Your credit score is a three-digit number that can have a big impact on your financial life. Unfortunately, it’s easy to hurt your credit score. For example, around 30% of Americans take on debt to get through the holiday season, which could hurt their credit scores if they don’t keep up with the minimum payments or allow their debt to get out of control.
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Although there are many ways to hurt your credit score, making on-time bill payments is a key way to improve your credit score. Rent reporting offers an opportunity to build your credit score by making your rent payments on time.
Explore how rent reporting could help you grow your credit score, which you could use as a wealth-building tool.
How Rent Reporting Impacts Your Credit Score
If you are looking to build your credit score, you’ll quickly discover that making on-time payments to your credit-based bills can have a big impact on your credit score. But traditionally, rent payments aren’t included in your credit score calculations.
Generally, rent payments only show up on your credit report if your landlord directly reports the activity to the credit bureaus. Since paying rent on time is critical for other reasons, you might be missing out on credit-building opportunities if you consistently pay your rent on time.
The good news is that rent reporting services are gaining ground. For example, Esusu recently announced a direct-to-consumer rent reporting service called myEsusu. Through this service, you can sign up to have your rent payments reported to the credit bureau. If you make on-time payments consistently, this could lead to an increased credit score over time.
If you anticipate missing a payment, myEsusu allows you to unenroll in the program to potentially avoid a hit to your credit score. On average, Esusu users have seen their credit score rise by 45 points, the service reported. Depending on your situation, the monthly fee of $2.50 per month or $29.99 per year may be worth the cost.
There are also free rent reporting services, like RentSpree and Self.
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How To Leverage a Higher Credit Score as You Build Wealth
Rent reporting may offer a key way to help you grow your credit score. But a higher credit score isn’t necessarily the end goal. Most want to leverage a high credit score as a wealth-building tool. Below are some ways a higher credit score can help you build wealth over time.
Enjoy Lower Interest Rates on Purchases
Most Americans finance large purchases, like a house or car, and borrowers with higher credit scores tend to enjoy lower interest rates. Depending on your credit score and the interest rate climate, the right credit score can lead to significant savings.
For example, let’s say you take out a $30,000 auto loan to purchase a new vehicle over 60 months. If you have an excellent credit score, the average new car APR is 5.25%, according to Experian, which leads to a monthly payment of $569.58. But if you have a credit score between 501 and 600, you could be facing the average new car APR of 13.18%, which leads to a monthly payment of $685.36. Drivers with the right credit score save over $100 per month.
If you use your good credit score to tap into a lower monthly payment, you lower the total interest charges associated with the loan. Of course, you could use the saved funds on lifestyle purchases. Or you could decide to invest those savings for the long term, which could supercharge your wealth.
Refinance Existing Debt
If you have been carrying around high-interest debt, especially credit card debt, refinancing to a lower interest rate can lead to significant savings.
For example, say you have a stubborn $10,000 credit card balance with a 20% APR. If you refinanced to a personal loan with a 10% interest rate and five-year term, you’d face a $212 monthly payment and pay off the debt in five years. If you didn’t refinance and put $200 per month toward your credit card balance, it would take nine years to pay off the debt.
The ability to refinance your high-interest debt offers a path to paying down your debt ahead of schedule. You can redirect the funds you save by refinancing to your long-term investment goals.
Tap Into Homeownership
Homeownership is a goal for many households. But interest rates can make or break your homebuying experience. Home shoppers with a good credit score can tap into a lower interest rate, which could put their dream home within reach.
For example, say you have an excellent credit score and tap into a 6% APR on a 30-year home loan. For a $250,000 loan, the monthly payment equals $1,499. But if you have a lower credit score and tap into a 7% APR on the same amount and term, the monthly payment equals $1,663. With the right credit score, you would save over $150 per month on your mortgage payment in this example.
For many, this could make the difference between moving forward with a home purchase or not.
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This article originally appeared on GOBankingRates.com: 3 Ways Reporting Your Rent Payments Could Help You Build Wealth
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