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Keeping Score

Renting an apartment: Should I raise my score or save for a big deposit?

Summary

If you have a low score and bad debts, you should try to resolve the debts as soon as possible. However, you may not have enough time to significantly improve your score if you’re looking to move within the year.

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Dear Keeping Score,

I plan to move to Chicago within the next seven to nine months. I have landed a new job, and starting in about a month, I will have to commute two hours to and from. I have a lease now, which is why I am doing this. As I am looking at apartments in Chicago, I have seen a few that mentioned minimum credit scores. I was not smart in college, so right now, my credit is around 520. My question is, should I put more effort in paying off bad debts to improve my score, or just save for a bigger deposit or money I can offer upfront? Thanks! – Darius

Dear Darius,

As you have discovered, credit scores can count for more than just obtaining new credit. Many landlords are interested in seeing your credit report because they want to be sure they can count on you to pay your rent on time.

Let’s talk first about those bad debts. I do suggest you get to work on clearing them, but you need to be smart about it.

Your reference to “bad debts” suggests to me that you are talking about debts in collection that you are considering settling on. Settling a debt for less than you what you owe can hurt your credit score, but yours is already quite low. If a debt settlement drops your score further, you’re heading in the wrong direction with regard to finding an apartment.

Instead, you might consider paying off your debts in full, if you can afford to do so. Paying off bad debts may not help your score (especially if they appeared on your credit report within the past seven years), but they may at least make you more attractive to potential renters and landlords. If the debts are closing in on the seven-year mark, it’s probably best to leave them alone as bad debts fall off your reports after that, and focus on rebuilding your credit with a secured card.

I also suggest you don’t start looking for new digs too far in advance. Hard inquiries for rentals that are made in a 45-day period are treated as a single inquiry under FICO’s scoring model. A landlord may or may not generate a hard inquiry during the rental process.

While commonly reserved for more serious transactions, such as a home mortgage application or for a major purchase, landlords do have the ability to request either a hard or soft inquiry on your credit if and when you have consented to the process. Hard inquiries typically lower your score by five points or less, but soft inquiries don’t affect your credit at all.

In the meantime, I suggest you save every penny you can for a larger deposit. You don’t have a whole lot of time to get your score up where you will probably need it. A 520 score is bad, as you know. Most landlords are going to want to see a score of at least 620, which is 100 points from where you are right now.

Even if it is nine months before you move, you probably only have about eight months to work on bringing up your score to where it needs to be before you have to start applying and putting down a deposit. I’m not sure you can do that in that time frame, even if you can pay off all of your bad debts by then.

There are a few other things you might try to make yourself more attractive to a prospective landlord who is going to pull your credit report. Since you say you were not smart in college, but you are in a lease now, I’m thinking that the mistakes you made haven’t carried forward into your current leasing arrangement.

See related: How many credit cards do you need to get a mortgage

Rent is generally not included on a credit report, but if you have had a good relationship with your current landlord you could ask for a letter of reference. There are also several rent reporting agencies that will report rental payments for a fee. Before you decide to try this, be sure that the agency will actually be reporting to three credit bureaus and that the cost is something you can afford.

You should also review your credit report to get up to speed with what’s on there and scan for any errors that may be weighing down your score. Checking your report yourself will not affect your score, and you can do it free at AnnualCreditReport.com. A prospective landlord may ask questions about what is there if they do review your credit reports, and you will need to have answers ready. Be prepared to tell them about your work to get the bad debts cleared and the steps you have taken since college to be more financially responsible.

And, if you discover any errors, you should dispute them as soon as possible so they can be resolved before you’re ready to start applying for a lease.

If you are not successful in bringing your scores up or finding a landlord who will work with you for a larger deposit, you might have to consider asking someone you trust – or more importantly, someone who trusts you – to co-sign on your lease. Or, you could look for a roommate with a better score to split the costs with. I know that neither of these are great solutions, but unless you want to continue commuting for the long haul, you may have to choose one.

Remember to keep track of your score!

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