How to build credit by paying your rent on time.

By Jared McKinney

Throwing that expense onto a credit card could unlock a great opportunity for building credit, but how can you actually do it?

This rundown of why you might want to build credit through rental payments and how to pay your rent with a credit card is broken up into three sections:

  1. A Quick 101 on What is Credit is and How to Build It
  2. Why Using a Credit Card to Pay Rent Has Been Difficult in the Past
  3. How to build credit with rental payments using Credit Cards and Debit

A Quick 101 on Building Credit

What exactly are the benefits of having good credit? Well, let’s start with what happens if you have bad credit:

  • You will have a harder time finding an apartment and passing the application
  • You will pay more for car insurance
  • You will face more difficulties applying for increased credit limits and loans

Meanwhile, with good credit:

  • Car insurance costs go down
  • You can be approved for higher limits on your credit cards
  • And - what might be most beneficial - you will be able to apply for loans with better rates

For many, renting is the precursor to homeownership, so working on building your credit during your years renting can provide a huge advantage for qualifying and being approved for better home loans.

While there are many resources for tips on how to build credit, building credit is simple to understand. You need to make yourself look responsible and trustworthy to creditors and lenders, so that they know you have a history of making payments when payments are due.

So, the basic steps of building credit (AKA being financially responsible) are:

  • You need a credit history of consistently making payments on time and having credit card accounts open - any less that 5 years is detrimental to getting the best rates for home loans
  • You need to maintain a low debt to limit ratio: What’s considered the 30% utilization rule, you do not want to maintain debt that is more than 30% of your total credit card limit over multiple payment cycles. For example, having $5,000 owed in credit on a credit card that has a $10,000 limit would be 50% utilization and will harm your credit.
  • Keeping track of your credit score is one of the best ways to start taking steps towards building your credit. Credit Karma’s free credit reports allow you to review an estimation of your credit score that is updated almost weekly

Income does play a factor (if you have no income, then your trustworthiness for paying back debt is highly questionable), but having a lower income doesn’t mean that you cannot have great credit. Thus, a key to building credit is to build up a credit history and make payments on time, so that you do not build up more debt than your total credit card limit.

Why Most Landlords Haven’t Accepted Credit Cards in the Past

How does this tie in with paying for rent? Well, historically it’s very rare for apartment complexes to accept credit cards for rental payments. Why? There have been a couple reasons.

One, reason has had to do with legal responsibilities on both the tenant’s and landlord’s side. Mostly because in the case of a dispute, the payment must be between the tenant and landlord - when you use a credit card, the payment is actually coming from the credit card company.

Also, since rent is due on a specific date, it’s important for the pressure to be on you to make sure the landlord receives their rent. If a landlord were to accept credit cards, they would have to go through the credit card company and the chance that the credit card company might not release payment on time - and who do think it is easier for a landlord to get their rent from in the case of a dispute, you or a credit card company?

But, the biggest reason has been because of the fees. For the average credit card, the typical transaction fee costs about 3%. When that’s being added to your largest monthly payment, that extra 3% can really add up. For example, say your place rents at $800 a month. 3% of your monthly rent would put you at an extra $24, or an extra $288 per year. It adds up.

All a landlord wants is their rent, so because of a mix of these reasons it usually doesn’t make very much sense for a landlord to go the extra mile just to accept a credit card when cash works just fine for them.

How to Pay Rent Rent With a Credit Card - Or Direct Deposit

Yet, despite the difficulties landlords have faced in the past for accepting credit cards,, the draw to being able to build credit with rental payments is undeniable. You will be paying for your rent anyway and putting an amount on your credit card that is between 20%-30% of your income each month and paying it off immediately is an easy win for building credit quickly.

Well, as long as you actually do pay off your credit cards.

This is where irresponsbility with paying your bills can really damage your finances. Basically, if you tend shrug off paying bills, paying your rent this way is probably not for you.

In the last couple of years, a few companies have popped up to play the middle ground between tenant, landlord, and credit card bureaus. The most popular, RentTrack, allows you to pay your rent through direct deposit or credit card.

Building Credit with Direct Deposit Rental Payments:

The direct deposit option with Rentack works like this:

You sign up with RentTrack and make your rental payments through them. They report your payment to the three main credit bureaus - Experian, Equifax, and TransUnion - , and send your rental check to your landlord on the date that you specify.

To break it down, all you need to do is:

  1. Create an account with a company like RentTrack
  2. Provide your rental address - where you live
  3. Create your rental check to provide the amount the check is for and when you want the check to arrive (the day or day before your rent is due)
  4. Provide your landlord’s mailing address
  5. RentTrack will verify your identity and credit history (make sure you are you and you’re financially reliable)
  6. Once verified, you provide your banking account information and reconfirm the date you want your check delivered, the amount, etc.

Using a Credit Card To Pay Rent with RentTrack:

The option also exists with credit cards, however your landlord has to sign up with RentTrack as well. In this case, RentTrack doesn’t have to report to the credit bureaus because you will still be paying with your credit card, and thus will have to pay that off.

Be able to build one’s credit score with one’s rental payments has been a long time coming, but it was till recently that companies such as RentTrack popped up to fill the gap between the renter, landlord, and credit card issuers.

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