Going for a Home Loan - Does Paying Rent on Time Improve My Credit Score?
Peter Morales Valovirta •
We'll spare you the long version, the answer is no. Not directly (unless you have done something very wrong), but that doesn't mean you can disregard your on-fleek payments as they are vital aspects in proving your financial muscle flexing. Let's be honest, if you are reading this, you are most likely a person who cares about finances and take a proactive approach to manage them, so let us take you through how you can use your rental payments to improve your financial profiling and potentially use it for a home loan.
How Credit Scores Work
Before we fully shun the chin the impacts of rental payments on your credit score, it's important to understand that although being good with rental payments doesn't directly improve your scoring, being bad certainly does. This is simply if you fall behind on payments to the level where you get blacklisted, that might however still not mean that you will see a big mushroom cloud on your credit score.
Credit scores in Australia are accredited by 3 main credit agencies, each of them have their own formulas for how they calculate your credit score, however we can gain an insight into how Equifax (these guys are also one of the big tenancy check databases in Australia), the largest scoring agency factors you financial grading.
What makes up your credit score
With this delicious infographic provided by Equifax, we can actually see what makes up your credit score. What we might deem having big impacts are most likely not, equally the big ones can be surprising. There's a reason they say you shouldn't apply for too many loans as financial institutions run so-called 'hard credit checks' which numbers against your scoring, which represents about 51% of your score. Repayment history is everything from personal loans, mortgages and credit you have with either businesses or financial institutions, worth noting is that telcos and utility providers aren’t allowed to share this information.
When someone ends up being blacklisted as a result of rental payment failure, they are scored in the 'Adverse events' category, accounting for only 10% of your score, this is why people with payment failures can still have viable scores even though they have demonstrated financial failures.
But there are other ways you could use rental payments to improve your lending power.
It's important to remember that just because your credit rating isn't improved by you paying your rent on time, you should still keep tabs on all aspects of your finances as bad habits often spill over to the way you manage your financial responsibilities, say your timeliness with repayments of credits and so forth.
Build your own financial case
When you finally make the decision to push the button on that dream house of yours, your bank will not only conduct their own background checks but also expect you to provide proof of on time payments, this can be your rent payments, credit card repayments and other loans.
Using your rent payments as proof of your ability to pay on time places you in a lower risk category, giving the bank more trust that you are reliable with your payments.
Keep a flawless track record by being proactive with your rent
Paying on time usually flows easily when forecasting and budgeting it on a monthly basis, but it's easy to oversee issues that arise when our life throws curveballs. We might change jobs where salary payments change from monthly to fortnightly or say where you simply have to take out money from your direct debit account for a last-minute emergency. They are all fairly innocent situations, but can inherently result in unforeseen problems like paydays not matching the rent payment day or that there are simply not enough funds to initiate the direct debit.
Remarking even one late rental payment can set a bad introduction to a loan application, being proactive is It is therefore important that you choose payment methods that allow flexibility and the ability to make your payments on time.
Your real estate agent should provide you with options like instant payments, allowing you to make real-time payments, ensuring your rent is not merely paid on time but also lands in the landlords account in the very moment. Instant payments are great in the sense that they allow you to pay the rent if your pay comes in on inconsistent dates, rather than relying on Direct Debit that is set for monthly intervals.
Equally, having the ability to use Direct Debit is crucial if your salary is in sync with your rent payments to allow it to process it on a set date every month.
It is an easy way to mitigate the risks of late rent payments by simply choosing the right tools that allow you the flexibility that life requires.
Using your rent payments as genuine savings
Using your rental payments as proof of your payment capability is one thing, but with many lenders, you are able to use it to apply for a home loan with lower deposit by showing your ability to pay consistently and on time. This is called genuine savings, you might not have the money at hand but it shows that if you were to get a home loan, you would be able to keep up with the repayments.
Worth noting is that the longer track record you have, the better your case, normally banks allow genuine savings for track records above 6 months, but even then it might mean that you are restricted to a smaller loan and higher deposit.
Bottom line is that keeping rental payments on time has more benefits than what people might think, and when it comes to getting your own home, rental payments play a big part in this.