Renting vs. Buying: What Affects Your Credit?

Guest Article by Alayna Pehrson – Content Management Specialist for BestCompany.com

Choosing to leave the renter life behind to become a homeowner can be an exciting and difficult decision to make. Becoming a buyer means taking on a significant amount of financial responsibility. And that can be scary, especially if you aren’t fully aware of what you are getting into.

Buying a home doesn’t have to mean the end of your financial stability. You just have to prepare for it and know what will happen when taking this life step. Keep in mind that the decisions you make can affect your credit when you rent versus when you buy a home.

Renting

Renting definitely has its pros and cons. One pro is that you don’t have to worry about paying a mortgage or property taxes. One con, on the other hand, is that you have to live under the property manager’s rules and the living situation is often temporary.

So, how can renting an apartment or home affect your credit?

  1. Rental Credit Checks. When you decide to rent an apartment or a home, your property manager may want to check your credit. This credit check, otherwise known as a credit inquiry, can actually hurt your credit somewhat as it is considered a hard inquiry. However, you would probably need to face more than one or two hard inquiries in order to really hurt your credit score.
  2. Rental Payments. Paying your rent on time each month can potentially help you build good credit if your property manager reports those on-time payments to at least one major credit bureau. However, your credit could be significantly damaged by late payments if your property manager does, in fact, report your monthly payments.
  3. Credit Card Payments. If you use a credit card to pay your monthly rent (and if you pay your renton time and in full each month) you could build up good credit. Again, you should keep in mind that making late payments with your credit card can hurt your credit.
  4. Delinquencies. Getting evicted from the rental property, failing to pay your rent, or not paying extra fees your property manager requires could hurt your credit if your property manager reports to a credit bureau.

Overall, there is less financial stress put on renters than buyers, but you should still know how renting can affect your credit score. As a renter, you have a few simple opportunities to build up your credit score. Once you decide you are done renting and want to make the transition to becoming a buyer, you will need to have good credit to do so if you stay on top of your financial responsibilities.

Buying

There are several things you should consider when you buy a home. What location are you going to choose? How much are you willing to spend? What mortgage loan are you going to get? The list of things to think about can seem endless. Here are just a few ways buying a home can affect your credit:

  1. Mortgage Loan Credit Checks. When you apply for a mortgage loan, your credit gets checked. This type of credit check is also considered a hard inquiry and can negatively affect your credit score. You may have to apply for multiple mortgage loans in order to get approved, so you may end up facing a few hard inquiries.
  2. Mortgage Payments. Paying your mortgage payment on time and in full is incredibly important if you don’t want to risk damaging your credit score. Staying on top of your mortgage payments can really help you build good credit.
  3. New Debt. When you buy a house, your credit score may lower a bit because of how much new debt you are taking on. However, your credit score will most likely improve in the long run as you start making mortgage payments on time.

Clearly, when it comes to buying a home, your credit should be a top concern. Not only does good credit help you for the initial approval but good credit will also help you get the best interest rate possible. Many things can benefit your credit score when you buy a home including adding to your credit mix, extending the length of your credit history, and building good credit if you pay your mortgage payments on time and in full.

Although buying a home may not be the best option for everyone, it may be a step in the right direction for you. Before you make the transition from renter to home buyer, check your own credit score and credit reports to ensure there accuracy, repair your credit if necessary, and make sure you know the financial responsibilities that come with being a homeowner.

 

Carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

Posted in Finance
Learn how it works

Questions about credit repair?

Chat with an expert: 1-800-255-0263

Facebook Twitter LinkedIn