It may appear to be the perfect time to purchase a home, but high unemployment, non-existent savings and poor credit are just a few of the concerns preventing potential homeowners from taking the plunge. Many cannot take advantage of current mortgage rates because of strict lending standards as well. That’s exactly why rent-to-own (also known as lease-option) properties are becoming so attractive.

What Is Rent-to-Own?

Just as it sounds, rent-to-own refers to a payment agreement in which a renter eventually becomes the owner of an item. Rent-to-own agreements can apply to everything from big screen TVs to cars, or in this case, even houses.

When it comes to a rent-to-own home, the renter and seller agree upon a purchase price and then rent is paid each month with a portion of it going toward the eventual down payment. Generally, the rental payment is higher than a traditional rental agreement — for instance, a home that normally rents for $800 would instead go for $1,000 per month under a rent-to-own contract, and a predetermined portion of that would go toward the the down payment.

Depending on the terms of the contract, the buyer will either be required to purchase the home at the end of the lease period, or can decide whether or not to commit to buying. This is a very important term to have clear in the contract, as some buyers find they don’t even qualify to buy the home after the rent-to-own lease is up.

Upside to Renting-to-Own

There can be several benefits to opting for a rent-to-own contract instead of traditional financing:

Down payment made easy: You don’t have to save up for a down payment for years while renting an apartment before finally getting your first home. A lease option lets you save for your house while living in it.

Time to improve credit: When your rent-to-own term is up, you still have to finance the remainder of the purchase price. One of the biggest reasons buyers opt for a lease option in the first place is because their credit isn’t high enough to get a mortgage. Renting-to-own gives you time to improve your credit standing while getting into your home faster.

Decide if the home is right for you: Rather than committing to a property and neighborhood right off the bat, renting first allows you to get a feel for it all and really decide if you’re a fit.

The Danger of Rent-to-Own Homes

Rent-to-own homes might seem like an obvious choice for anyone struggling to buy a house, but they can also turn into a money pit–especially if the renter either decides not to purchase after all or simply can’t.

• Higher rent: Whether you end up buying the home or not, you will be paying higher rent in the interim than anyone else renting out a comparable home. That may equate to thousands of dollars you could have saved for a bigger down payment while renting a normally-priced property.
• Repairs and maintenance: Usually, when you rent, the landlord is financially responsible for any maintenance or repairs that must be made. However, a rent-to-own contract may require you handle these expenses yourself.
• No investment protection: There are a number of scenarios in which you could lose all the money you’ve put toward a down payment. Whether you are unable to secure financing when the lease term is up, fall behind on payments and get evicted or just decide you don’t want to buy after all, you don’t get that extra money you’ve been paying back.

Rent-to-own is an option that works out well for some buyers, but keep in mind it could end up costing you a lot of money in the long run. More often than not, it is probably better to wait and buy a home when you can truly afford it, rather than gamble on your ability to purchase that home in the future. Of course, it all comes down to your reasoning behind choosing a lease option over traditional financing–just be sure you weigh your options carefully.

This is a guest post from the gang at GoBankingRates.com.

There are five areas that play into your credit score.  According to www.myfico.com, 35% of your score is based on your payment history, 30% on amounts owed, 15% on length of credit history, 10% on amount of new credit, and 10% on types of credit used.

So a couple of easy hints to derive very quickly is do not open a lot of new credit rapidly.  This shows that you have a potential or are thinking about increasing your debt.  And also, do not close a lot of cards rapidly as this decreases your available credit.

You might be asking why do they care about that?  Wouldn’t I be a lower risk if I could take out less debt?  Let’s look at that formula.  30% of your credit score is based on how much you owe.  So let’s say that you have $15,000 in available credit, but you only owe $5,000 in balances currently.  You have maintained that and gradually dropped it over the last year.  So you owe about 33% of your available credit.  You are in the average American spot.  Now, let’s say you close a couple of cards brining your available credit down to $10,000.  You know owe 50% of your available credit and just upped your risk in the credit card holder’s eyes.  The lenders sum this principle up with the words “proportion of credit lines used”.  This principle is why I recommend a balanced approach to closing cards.

A balanced approach to closing cards is where you work on reducing your debt and amount of cards you carry.  So using our above example, let’s say this year I reduce my balance from $5,000 in credit card debt to $3,000 in credit card debt.  I can then bring my available credit down to $9,000 and keep the same debt to available credit ratio that I had of 33%.  I would also take about 6 months to close the cards spreading it over some time so that I’m not making rapid changes in my credit life.  Rapid changes often equals a red flag.

In summary to the question we began with of “Will Cancelling Your Credit Card Hurt Your Credit Score?”  The answer is “it depends on how you do it.”  You can damage your credit score by closing many cards rapidly; however, there is a balanced approach to closing cards with minimal effect to your credit score and decreasing the weight of plastic in your wallet.

Photo credit

I don’t plan to borrow money for a new car loan, open up a new credit card or take on any form of future debt.  I’ve always had good credit history.  I’ve paid bills on-time, I’ve used a credit card and paid it off each month and haven’t really ever taken on debt other than a mortgage and car notes (which we’re trying to pay off).  Why should the credit report score matter?

I suppose my score might become more important to me if I had a past bankruptcy or problems with delinquent payments.  At that point, my low score would impact a new home mortgage which would come with a high interest rate.   My score, if low, might also become more important if I were looking for a new job.  Some employers consider credit scores to determine dependability of job candidates.

I can see the need for some sort of measurement for lenders.  They of course are trying to evaluate risk in extending loans.  While the credit score isn’t necessarily ideal it seems to be the measuring stick for many different things right now.

Personally, I hate to see someone who has taken steps to clean up past credit mistakes become impacted by the history on their report when trying to buy a home.  Sure, mistakes have been made and there are consequences, but it’s sad to see people plagued with ridiculously high interest rates.  Especially, when they’ve taken steps to stay out of debt, live on a spending plan and manage their finances wisely.

I recently read an article in Money magazine about things lenders look for when checking credit reports and how to make your credit report look better to lenders.  I’ve included my thoughts around each one of these areas.

Things lenders look for when checking credit reports

Inquiries and types of open accounts

Hard inquiries appear when you apply to open up a new credit card account.  Personally, I don’t think it’s wise to open up a lot of accounts even if you plan to keep the balances paid off.  Contrary to common opinion of trying to build up your score, I don’t like the idea of having a bunch of cards open , especially for someone who has had debt or payment problems in the past.

Lenders also want to see what types of accounts you’ve had open in the last 10 years and ideally want to see a good mix of credit types.  This is where the argument comes in to keep old credit cards open.   If you’ve opened accounts in the past and have paid them off, apparently,  it is credit score wise to keep them open. My thoughts are to cut up all the cards and keep one available for use.

Using too too much credit

Money says that you should aim to use less than 20% of your available credit.  Again, if you’re paying off your cards each month and avoiding other debts this won’t be a problem.  I think it’s unwise to use you a card for the sole purpose of building credit.  Use the card when it’s convenient or put it away in case an emergency occurs without adequate savings. But don’t use a credit card to chase after a higher credit score!

Not paying bills on time

Make sure you pay your bills on time.  According to the article, bankruptcies and liens show up on a report for ten years.  My advice is to plan well and keep good track of when bills are due so that you can have enough money in your account and pay them on-time.  This one just comes with practicing wise money management.

Big blunders

The article states that bankruptcies, liens and delinquent accounts can show up on a credit report for seven to ten years.  One bit of good advice from the article is to add a personal statement to your report.  Money says you can add one statement which provides you the opportunity to provide more background about your blunder, and most importantly the steps you’re taking to avoid the same mistakes.

Final thoughts

• Be patient if you’re trying to rebuild or improve your score.  It’s not going to occur overnight.
• If you’re trying to rebuild your score, the first step is getting your personal finances in order with a spending plan and performing good cash flow management.
• Don’t lose any sleep over not having a good credit score. The best thing to do is to focus on performing wise money management.  Common advice in building credit isn’t always advice that will help you manage money wisely.
• Don’t go out and open credit cards to build up your credit again if you’ve experienced issues in the past.  Again, my thoughts are to not have more than one card and show good financial responsibility in paying it off each month.

What is annualcreditreport.com?

If you’re not familiar with annualcreditreport.com, it is a site created by the three major credit reporting agencies, Equifax, Experian and TransUnion.  It provides a free, easy and convenient way to view your credit report from each agency once every 12 months.

Space out your credit report viewings

As I mentioned, I typically view my reports once per year.  However, I found out in the FAQs you don’t have to view them all at once.  You can space them out.  For example, you could view one report every 4 months to try to try and get ahead of any issues versus waiting an entire year.   The disadvantage is that you can’t compare the reports next to each other.

You don’t get your credit score for free

Keep in mind you can’t get your actual credit score from the free credit reporting service.  You have to purchase it from each agency and you can do this when you request your free report.  Personally, I don’t get too concerned with finding out my score.   I’m just there to review my reports for fraudulent activity even though it is a little bit tempting to take a peak.

Dispute information on your report or find fraudulent activity

I decided to visit Equifax.com and check out there dispute process.   Basically, you submit the dispute, Equifax investigates with the creditor, Equifax updates its files if the dispute is verified and results are delivered back in 30-45 business days.

Each agency has a process for placing a fraud alert on your file.  A fraud alert, used if you think your identify has been stolen, can make it more difficult for someone to get credit.  It can also make it more difficult for you to get credit and slow the process down.  If you place the fraud alert on your file with one agency, they will contact the other agencies and do the same.

For more information, I recommend going to annualcreditreport.com or visiting the websites of Experian, TransUnion, or Equifax.

What has been your experience with the annualcreditreport.com?