What Credit Score Do You Need to Rent an Apartment?
Published on September 28th, 2016
By Jennifer Oppriecht
Before you can sign that lease, a property owner will likely check your credit. So what credit score do you need to rent an apartment? We provide an answer, as well as insights on how to establish credit and how it works overall with borrowing money.
First-time renters become more financially sophisticated as you enter the renting phase of your life. Suddenly you become aware of the need for a checking account, a credit card, and how all these factors tie into your credit score.
We reached out to Ken Carlson, AVP of Consumer Lending of UW Credit Union, for some insights into how a credit score impacts your life and the renting process.
What is a credit score?
A credit score is a three digit number generated by credit bureaus to help assess risk. Using your financial history, an algorithm generates the score, which lenders and financial companies use as a factor in their lending decisions.
Credit scores are reported by credit bureaus, which gather your financial data from lenders on payment history, use of available credit, and other factor. There are a number of use credit-scoring models, the predominant one being a FICO credit score.
“The FICO credit score is the best indicator we have that helps us summarize a borrower,” Carlson explains.
Is there a credit score for renting an apartment?
Is there a “renting” credit score? Most property owners likely take the approach noted by Shannon Sloat, Community Manager with Steve Brown Apartments.
“We don’t really use the scores as much as the information in the report,” he said. Sloat said they review specific elements of the reports, including:
- What is the status of your current accounts – what are your balances? Do you pay credit cards on time?
- Do you have anything in collections, judgements, or do you owe money to a previous landlord?
(He also noted that Steve Brown Apartments does not hold medical items or student loans that are in collections against an applicant.)
While there may not be a specific score an apartment owner is looking for, it’s the elements that make up the score that will be scrutinized. Now let’s take a look at how lenders and financial institutions use credit scores.
How does a credit score work as part of the lending approval process?
For lending as a whole, Carlson explained that while lenders also consider other characteristics to evaluate a borrower, the credit score is the “universal item.”
Once you apply for an apartment, a loan, a credit card, or even a job, the organization evaluating you will contact a credit bureau and request a credit report. They will then review the report and make an assessment.
How can I check my credit score?
You can check your own credit score for free. As the Federal Trade Commission (@FTC) reports, “You’re entitled to one free copy of your credit report every 12 months from each of the three nationwide credit reporting companies. Order online from annualcreditreport.com, the only authorized website for free credit reports, or call 1-877-322-8228.”
What if I don’t have a credit score?
This is common among first-time renters, who may only have a checking account and very little credit history. As Carlson notes, you won’t get a credit score with a checking or savings account. “You have to establish a loan account that is reportable,” he said.
How do I establish a credit score?
There are a variety of financial products that will help you establish a credit score. These include:
- Credit card(s)
- Installment loan
- Student loan
- Overdraft line of credit
It makes sense for a freshman in college to begin establishing credit. Carlson said this could include a credit card with a low-limit, or even overdraft protection on your checking account.
PRO TIP: Carlson advises getting a low-limit credit card, use it every month, and then pay off the balance. “If you go to the grocery store, use the credit card,” he said. This method will allow you to accumulate transaction history. The lender won’t be looking for any specific number of purchases, just that you’re using the credit card responsibly.
Listen to Ken provide more in-depth advice on establish a credit score in this brief audio interview.
What can impact your credit score?
As we’ve just noted, your credit score will be influenced by positive credit behaviors, such as making credit card payments on time. But they can also be influenced by derogatory behavior.
This includes anything that reaches a collection account with a vendor — for example, maybe you didn’t pay your cell phone or a medical bill. These behaviors won’t help you establish credit, but as Carlson notes, “They will impact you if you already have a credit score.”
How does credit score affect your ability to borrow?
Unless you have a very low credit score, a lender will not reject your application for a loan or a credit card. However, the rate they give you and the term of the loan will be adjusted based on your score.
Take a look at a hypothetical scenario Carlson created, based on three tiers of credit scores. Note how the rate goes up, as does the monthly payment based on the tier.
What’s significant about these tiers is not just the difference in monthly payments, (which may seem relatively small here, but do add up over time.) It’s also about the other components of the loan.
For example, a person with A+ credit may be able to finance everything associated with the car – the payment, the title, the tax. “They can go up a higher loan to value,” Carlson said.
A person with B credit may have to pay the sales tax, and it won’t be included in financing. Someone with C/D credit will have to pay the title, sales tax and licensing fee – AND 10% down. It affects lending in many ways — not just the interest rate.
How much credit should I get?
To establish a good credit score, Carlson recommend you get one or two major types of credit cards (Visa or Mastercard.) A department store card could be helpful, but only if you frequently shop at the store.
Longevity is the key: You’ll want card(s) you’ll stick with. “Don’t be enticed by offers from different credit cards,” he said.
For example, if you went into a store and they offered a 10% discount on your purchase for opening a new line of credit, you should reject the offer unless you frequently shop there.
Credit bureaus don’t like it if you have too many cards open. If you get too many cards open (beyond 5, Carlson said), there is a larger potential for negative impact that will mitigate that 10% discount.
What do you do if you’ve had credit problems in the past?
The first thing you’ll want to do is obtain a credit report. The report from annualcreditreport.com is the best resource, because it combines all 3 credit bureaus (TransUnion, Equifax, Experian) into one report. (Sometimes one bureau might have a piece of data that the others don’t.)
If you come across data that you don’t believe is correct — such as a late payment, or a report that a credit card is open when you know you’ve closed it — reach out to that particular vendor. Keep documentation of your interactions as you work to correct the problem.
How do you maintain a healthy credit score?
We’ve touched on some of the ways to establish credit, and why it’s important. Now let’s summarize our tips on how to maintain a healthy credit score, and add in a few new ones:
Use 1-2 credit cards regularly. Add in a department store credit card, but only if it’s a store you use frequently.
Don’t get more than 5 credit cards. Remember, the bureaus don’t want to see you take on too many cards.
Use your cards every month. Even if you don’t make many purchases, use credit cards at least 1-2 times a month and pay your balance in full, just so you have a transaction record.
Set-up electronic payments to always ensure you’re on time. You can link up payments to vendors like cell phone companies and have them pull automatically from your account, so you’re never late with a payment.
Don’t use more than 30% of your credit limit. Credit card companies are happy to extend you credit, but avoid using more than 30% of your overall credit limit. Credit bureaus might interpret that as a signal you’re carrying too much debt.
If you fall behind in payments, call your creditor. Everyone runs into tough times. If you find you can’t make monthly payments on a bill, call your creditor. Avoiding the problem only makes matters worse. If you call them, they’re probably be more likely to make special payment arrangements, as long as they’re aware of your situation.
Resources for Establishing / Improving Your Credit Score
We’ve provided several videos in this post, along with insights from UW Credit Union’s Ken Carlson. UW Credit Union also provides workshops and information on credit scores and your credit history. Click here to learn more.