A credit score is an integral part of everyone's financial profile as it determines if landlords are willing to rent, mortgage companies are willing to loan, credit card companies are willing to approve a card, and even if some employers are willing to hire.
Credit scores are influenced positively by a history that shows consistent on-time payments of all bills, including housing, utilities, credit cards, and more. Conversely, late payments and a significant amount of debt can negatively affect your credit score, particularly on credit cards.
The average U.S. Credit Score is 714, and while it is possible to qualify for a home loan with a minimum credit score of 600, these borrowers will pay a higher interest rate and possibly have other additional costs to close the loan.
So, how can you quickly build your credit score while renting a house or apartment? First, start reporting your monthly rental payments to one of the credit bureaus. Second, catch up on past-due accounts and make payments on time. Finally, apply for new accounts only when needed and dispute any credit report errors.
How to Get Credit for the Rent You Pay
Rent is most people's most significant monthly expense, and many renters don't know that reporting monthly rent payments to credit bureaus could improve their credit score. According to NerdWallet, less than 1% of credit files contain any rental payment information, even though all three major credit bureaus (Equifax, Experian, and TransUnion) will include rent payment information when they receive it.
These credit bureaus then provide data that goes into your credit score. The two major credit scoring companies, FICO and VantageScore, handle rent payment information differently. Some older versions of the FICO score don’t use rental payment information in calculating scores, while newer versions, such as the FICO 9 and FICO 10, do consider rental information included in your credit report. VantageScore also considers rent payment information. And while you can’t report rent payments yourself, you can use several rent-reporting services to report your timely payments. The cost varies by the service, with most charging a monthly fee to the renter or landlord.
Use a Rent Reporting Platform
Over the past few years, property management software platforms have started allowing landlords and renters to report on-time rent payments to a credit bureau. Ask your landlord if they have a system for reporting rent payments. Some landlords might already offer the option to report rent to the credit bureaus and help you improve your credit. Many of these platforms, like Avail, offer services such as CreditBoost to report monthly rent payments to TransUnion, and renters can choose to report their past and/or current payments to the bureau. Renters or landlords pay a small monthly fee to have their payments reported to TransUnion.
Fannie Mae offers landlords a rent payment reporting program to help renters build their credit history and grow their credit scores. The Positive Rent Payment program links owners of multifamily properties financed through Fannie Mae with three vendors, allowing the landlord to report tenants' on-time rent payments to credit bureaus for one year. Fannie Mae will reimburse the vendors; no costs will be passed to renters.
If your landlord does not have a payment platform with reporting capabilities or mortgages through Fannie Mae, you can enroll in an independent rent-reporting service for a fee. Make sure you verify they will report to all three credit bureaus. Two free rent-reporting services include:
Piñata: This free service is available to renters, no matter their landlord. It reports to TransUnion.
Self Credit Builder: Self offers a basic plan that reports rent payments to all three credit bureaus for free or a varied cost depending on the rent reporter.
A comprehensive Rent-Reporting Services Guide can be found here.
How to choose a rent-reporting service
First, check to see if your landlord already works with a service. If not, here are questions you should ask rent-reporting service providers before choosing one:
What are the total costs for a year of service, including any setup, management, or reporting?
How is personal data protected?
Which of the major credit bureaus receive the information? (All three are ideal.)
Is free access to credit scores provided, and if so, which score(s)?
How soon will the information appear on a credit report?
How can the service be canceled?
Is missed rent reported during a landlord dispute, or if the lease is broken?
Knowing that missing rental payment information can hurt your credit score before signing up for a rent-reporting service is essential. Since rent reporting is opted into by customers, only positive behavior will be reported by your service. If nothing is reported for a month, it may be assumed that the rent was not paid, negatively affecting your score. In addition, rent-reporting services may include information for any missed rent payments to their connected credit bureaus. The missed payment on your credit history may drive down your credit score. Finally, a landlord can report any missed payments to a credit bureau. Missed payments will be a negative mark, and as payment history is one of the most critical factors in calculating your credit score, your score will likely go down.
In close, for those who pay rent on time, it is important to calculate if paying for a rent-reporting service is worth the potential increase in your credit score. The rent-reporting agencies have reported customer gains in credit scores ranging from a few points to hundreds of points. While rent payments are a significant consideration for credit scores, several other factors affect the score, including credit utilization ratio, the mix of credit currently open, and credit history for any other open lines of credit. So, while paying rent and having it reported to credit bureaus can positively impact your credit score, it is only one of many ways to drive your credit score higher.
References:
https://www.experian.com/blogs/ask-experian/what-is-the-average-credit-score-in-the-u-s/
https://www.nerdwallet.com/article/finance/fico-score
https://www.nerdwallet.com/article/finance/fico-score-9
https://www.nerdwallet.com/article/finance/new-fico-score-10-t
https://www.nerdwallet.com/article/finance/vantagescore-fico-score-the-difference
https://www.avail.co/education/articles/best-free-property-management-software-for-landlords
https://www.avail.co/tenants/report-my-rent
https://www.self.inc/blog/report-rent-to-credit
https://www.nerdwallet.com/article/finance/rent-reporting-services
https://www.nerdwallet.com/article/finance/does-breaking-a-lease-hurt-your-credit
