How Paying the Rent Can Boost Your Credit Score
In these times when credit is still tight, money is short, and jobs are hard to come by, the benchmark of your credit score carries more weight than ever.
In a sense, your credit score is a crystal ball that's meant to reveal your character, and building a credit history is key to making that picture clear. Traditionally, that meant taking on debt that you could then pay off, like a mortgage, car loan or credit cards. But in terms of your credit history, paying your rent on time meant nothing.
Now, there's an option for the nation's more than 100 million renters -- the newly launched RentReporters.com, which verifies your rent payments with your landlord and securely provides the information to Payment Reporting Builds Credit, which then can be included in a FICO Expansion Score.
Experian announced earlier this year that it would accept rent payment data as a traditional credit item on its national credit reports.
"Having been where many of our customers are now, I know firsthand the economic circumstances that can result in a poor credit score," said Crispin Luna IV, founder and president of RentReporters.com, in a prepared statement. "RentReporters.com allows essentially every renter in the U.S. to take one step closer to homeownership and leverage their rental payments towards a better credit profile."
What You Need to Know
It's a fairly simple process to get started: Sign up on the site, provide a few details, and once the data is uploaded, you're good to go. "You don't have to worry about destruction or storage of payment records, staying in contact with landlords, or a landlord being unable to rate a tenant's payment history," Luna explained to DailyFinance.
The service is free for landlords, but for renters, an annual membership costs $89.95, with a $49.95 renewal fee, or you can pay an initial set-up fee of $39.95 and $5.95 a month.
Generally speaking, the idea is sound and could benefit a lot of people, particularly those who are under-banked or non-banked, says Ken Lin, founder and CEO of CreditKarma.com, a consumer education site.
Still, it's somewhat uncharted territory. "There is not enough statistical data to determine the absolute relationship of rent payments to credit default," says Lin. "This type of modeling is not widely used and it is not widely accepted by creditors. Outside of Experian, who is just beginning to test this, you are paying money for something that isn't widely accepted or proven."
He also thinks it's too expensive. "You could spend a bit more and get a secured credit card. Most secured credit card issuers report to all three bureaus, and this is a widely accepted way of building credit, even if you don't have credit to start."
Mike Melby, co-founder and CEO of PayDivvy.com, which offers online bill payment services, suggests an alternative: "Many other bill payment companies such as PayDivvy, AccountNow and ReadyDebit offer credit reporting for free, as a part of their bill pay service."
Lastly, says Lin, rent bureaus are subject to gaming. "Whereas banks have automated credit reporting logic, rent bureaus are subject to landlords who will have inconsistent interpretations of 'on time.' They may also be inaccurate because of any number of biases. For example, a renter could report a friend as their landlord to help build credit. Future creditors that rely on credit scores won't like the subjectivity and human bias when it comes to risk," warns Lin.
Long term though, any type of payment history will be useful. "Rent is one idea, but probably not the best," says Lin. "Utilities and mobile services might be much better risk indicators, since they take the human factor out of the report and have equal market penetration. Moreover, these type of payments are more similar to credit risk. For example, you might always pay your rent because housing is a necessity. But cells phones or cable bills are not, and much more similar to how consumers' prioritize their finances when money is tight."
Melby offers a more optimistic view. "If you are in a similar situation to many Americans today, you've racked up loads of credit card debt and dealt with a lot of late payments, which may have affected your credit score," he says. "A service like this will not work magic overnight, but it will help over time. Every little bit helps, so seize the opportunity ... just make sure you are doing it time and cost effectively."