Cash or credit? Understanding the Importance of Credit Score in Real Estate and Renting

Throughout the day, think about all the times that you have to pay for something. So many of us reach automatically for a credit card or even our phone for a quick payment. Like so many people, I often spend weeks without using cash to pay for a transaction.

If you are planning to apply for a lease, and even eventually a mortgage, take a moment to think about why "cash is king" in the context of the real estate industry. As an individual consumer, your credit score is a critical aspect that can define what homes may be available for you to lease or purchase.

As a tenant, you need to have a good credit score in order to complete a lease application. In my experience, a low credit score may prevent an individual from submitting an application.

Down the road, a good credit score is essential in order to qualify for a mortgage to purchase a home so it’s worth spending time reviewing and improving your credit score years before you even plan to buy a home.

Understanding and Checking Credit Scores

How do you even check your credit score? As a starting point, there are various products that can give a credit score. However, some are better or more thorough than others. For example, the criteria used by a bank to determine credit scores may be more stringent than a credit card company. In addition, a loan officer may take an even deeper dive to determine eligibility for a mortgage.

How is Credit Score Determined? There are a lot a range of factors that are considered:

• Payment history: A history of paid bills on time is a major factor.
• Accounts owed: The amount you owe, or outstanding debt, also matters.
• Age of credit: The length of the credit owed is a factor in the analysis.
• New credit lines: A new credit card or loan can impact credit score.

There is no magic answer for how a credit score is determined. Using algorithms, different entities calculate a credit score based on a mix of the above factors – and sometimes even incorrect information. Be sure to review all the information on the credit score history in case there is outdated or inaccurate information.

The overall use of credit, known as “credit utilization,” can be another big factor. So, the next time you are making a casual purchase - reach for cash or a debit card before a credit card. These little actions can add up to a big difference in the long-term.

In my experience, credit scores can even contain information based on identity theft! While no one wants to be in this situation, it is better to find out about a problem then work to correct it.

Improving and Building Your Credit Score

Don't let your fears or anxieties stop you from learning this information. Working with the right people at a bank, many individuals are able to address credit issues and build a better score. Experienced professionals can offer terrific advice about the type of specific payments that may yield the biggest impact based on a specific situation, so find someone that you can trust and work with if you have a concern about your current score. Alternatively, pick one of the major credit bureaus, like Experian, Transunion or Equifax. All three of these companies have online tools to check and monitor your credit score.

Maybe you avoid credit cards as a way to avoid bad credit? This strategy may have some pitfalls too. In order to have a strong credit score, you need to have a history of credit. In my experience, clients can be added to their existing credit card held by a parent or significant other as a way to help build their own credit history.

Credit scores are important – at the same time, these aren’t numbers that are written in stone. With hard work and monitoring, scores can change over time. There are also different thresholds of what scores may be necessary depending on the amount of rent or mortgage.

Credit Scores and Your Rental Application

Don’t be afraid to ask if there is a specific credit score range that a landlord requires. If you can demonstrate evidence of a strong work history and solid financial stability, the landlord may take these factors into consideration along with credit score. If you’re moving to a new area, be sure to ask – different regions have different expectations so it’s important not to make assumptions about what score may be required for a particular property.

As a real estate agent, I hear a lot of concerns about “hard” credit inquiries. A “hard” credit inquiry shows up on a credit report and a high number of credit scores inquiries can impact your credit score to a certain degree. For this reason, you may want to limit the number of rental applications submitted at the same time. Or, while browsing, offer to provide a copy of your credit score from one of the agencies mentioned above.

A landlord may use a credit score in their determination of a security deposit or - ideally - justification for a lower security deposit. A really strong credit score could even be the basis for a reduction in rent or other favorable terms.

Already renting? You can ask your landlord to submit information to a credit bureau which can strengthen your credit history and existing credit score.

The Sum of it All

Whether paying rent, a utility bill or a credit card, on-time payments make the most significant difference. In my opinion, scheduling early payments can help make sure that you never miss a payment, even by a day.

So is cash really king? Not really! A strong history of credit combined with a strong credit score can open up the same doors for both tenants and homebuyers. Based on my experience, the most important factor comes back to relationships – working with trusted individuals invested in your personal success can overcome even the toughest credit situations.