Renting has, for a long time, been a stepping stone to homeownership. Yet, over the past 50 years, more Americans are renting for longer periods, with many never moving beyond that point. Additionally, rental prices are going up everywhere, while the availability of units has stagnated and even decreased in some markets.
More restrictive lending in the housing market is a key factor to why more people are renting than ever. And far more Americans are choosing to live in urban areas—where renting is more customary and more expensive—instead of in the suburbs.
Still, even as more people move to cities to find work, a large number would prefer to buy a home. A 2017 Pew study found that 72% of renters would like to buy a home in the future. One of the major factors preventing many renters from becoming buyers is a low credit score, however, this can also make renting more difficult.
Putting aside the argument that renting is “throwing money down the drain,” renters who intend to own a home in the future can view renting as a good opportunity to build a positive credit history. There are several things renters can do to help make the rental process simpler and help establish a better credit score, while saving money for a down payment.
Find a Guarantor if Your Credit Score is Too Low to Rent
Many first-time renters discover that landlords typically ask for a credit check during the application process. If you have nonexistent or bad credit, then you may have difficulty qualifying for a rental. If there’s a crunch for housing, which is currently happening across the U.S., then you’ll need to beat out the competition with more than just a proof of income. A good credit history can go a long way to securing the housing unit you want.
Those with no credit, bad credit and even sometimes moderate credit may want to consider having guarantors sign their lease applications. A guarantor is someone who legally agrees to pay rent if the renter fails to make payments. You can ask a trusted friend or family member with a good credit score and a higher income to be a guarantor. There are also several startups that now operate as guarantors for individuals struggling to secure rentals due to credit issues, such as TheGuarantors.
Ask Your Landlord to Report On-Time Payments
Once you do have an apartment or house rental, you can easily start building a positive credit history. Ask your landlord to report your payments to the three credit bureaus, or you can use a company such as RentTrack to report them for you.
Keep in mind that your landlord can also report negative information if you fail to make rent payments.
Purchase Renters Insurance to Protect Your Assets
Remember that your credit score will only be part of the equation if you’re hoping to secure a home loan in the future. Banks will also need to see assets in the form of cash on hand. Saving will be integral, but you’ll also need to consider how much it would cost to replace expensive items in your home.
Renters insurance may or may not be a necessary purchase. Similar to homeowners insurance, renters insurance is designed to cover the value of the items in your rental home should you lose them in a covered event such as a fire or theft. Renters insurance will significantly reduce how much you would have to pay out of pocket to replace your lost property.
There’s a chance your rental agreement already requires you to purchase renters insurance. However, even if it’s not a requirement per your lease, the cost is still extremely low. In Florida, for example, you can purchase renters insurance for as low as $26 a month, making it $215 less per month than homeowners insurance.
You can also bundle your renters insurance with other insurance policies and save on costs. Many car insurance companies, such as Progressive and Geico, also sell renters insurance that can be added to your existing car insurance policy. Using that method, you can bring down the cost even further.
Track Ongoing Costs and Create Actionable Plans to Lower Them
Apartment living will always come with fixed costs that you can’t really avoid. Electricity, water, gas, sewer, trash pickup—these are all costs you should consider and budget for. However, there are still ways you can bring down even the utility costs, while making plans to help reduce spending in other areas as well.
During the winter, for example, it’s best to keep the thermostat lower and wear warm clothing. The U.S. Department of Energy suggests setting your thermostat to 68 degrees in the winter. This may sound cold, but combined with blankets and warm clothing, it should help keep down costs during the winter when electricity and gas costs tend to shoot up.
You can apply that same principle to the other seasons as well. In the fall, keeping the thermostat off and bundling up will avoid the cost run-ups. And in the summer, raising the temperature in your home to a warmer temperature you can manage, say 78 degrees, can minimize the higher energy bills common with the season. Keeping your home properly shaded during the summer can go a long way as well.
Renters should also seek ways to save on rent. Many apartments owned and managed by rental management companies offer discounts for various reasons. Teachers, firefighters, police officers and others working in public service may get discounts. You may also get a discount if you’re a student.
And of course, consider how much you’re paying for food, which tends to be among the highest expenses for many individuals. Dining out less and cooking at home more can save you thousands of dollars a year.
While You’re Cash-Strained, Don’t Take Risks
Everyone wants a little bit of luxury in their lives. But while you’re trying to build your credit score and potentially move out of apartment living in the future, you’ll need to be far less risky with your spending.
That includes not engaging in some activities that might cause you to increase your spending per month. For example, if your apartment allows pets but charges an extra pet fee, it’s probably not a good idea to get a dog or cat. Not only will you increase the cost to your monthly rent, you’ll also need to factor in costs for pet care, including food, veterinary costs and potential medical emergencies that your pet may endure, which can cost thousands of dollars.
You will also want to play it safe regarding any changes you make to your apartment. Hanging that new painting by yourself might sound like a good idea, but if you accidentally put a large hole in the wall, you will have to pay for it—either immediately or through losing your security deposit (which is what the security deposit is ultimately for).
And thinking beyond your apartment costs, it’s good to take fewer risks while you’re building your credit score in general. Avoid making large purchases that might impact your credit score or taking on any loans (such as car loans) if you can avoid it.
As you consider how to prepare for buying a house, there are certified nonprofit housing counselors available to walk through the process with you. If you’d like help figuring out how to make it a reality for you and your family, contact a counselor today!