Introducing Rent Reporting - A Debt-Free Way to Build Credit
Rent reporting is a huge new opportunity for millions of renters, and especially for young adults. In this first installment of our three-part series, Introducing Rent Reporting, let’s take a look at the most salient questions people might have when trying to understand this new addition to consumer credit.
What is a debt-free way to build credit history?
Rent payments are different than any other type of account that might end up on your credit profile. First, rent payments typically aren’t considered ‘debt’ - you don’t have some large outstanding or recurring balance that you are trying to pay down in order to establish credit. Second, the resident (not the creditor) decides to report this payment data to the bureaus by “opting-in” to submitting payment history. This is not the case when it comes to any other debt-based payments such as credit cards, auto loans, personal loans, student loans or a mortgage. In all those instances, the creditor typically reports without any choice on the part of the payor. Finally, some bureaus give you a one-time out - see the next question for details on this nuance.
Opt-in… does that mean there is an opt-out?
Well, yes and no. “Opt-in” puts the resident in control of whether or not they want their rent payment history to end up on their credit report. However, once the resident starts reporting, what will remain on the credit profile if a resident turns off credit reporting depends on the bureau. Even different departments within a single bureau have different guidelines for how long they will keep the data. While some might remove the payment history if a resident opts out, the resident should assume that their payment history will remain on their credit profile going forward.
Who is eligible to report rent payments?
Any resident named on a lease is eligible. If a resident’s property manager already uses an online rent payment service that can report rent to credit bureaus, then any rent payment they make can be reported. If a resident’s property manager does not yet use one of these services, they can use a service like RentTrack to sign up and invite their landlord.
What impact will rent reporting have?
Each bureau collects different types of information, uses unique scoring models, and reports to potential lenders through a variety of products. At a minimum, basic rent payment history will end up on a consumer’s credit report for them and others to view. This is only the beginning, however, as bureaus are starting to incorporate rent payment history into popular scores like the tri-bureau Vantage score.
There are traditionally five primary credit categories that impact credit score calculations: payment history, credit card utilization, hard inquiries by potential lenders, average age of accounts, and the mix of the types of accounts. Your payment history typically represents 35% of your total score and is more important than any other credit-scoring factor. It is unclear how much weight rent payment history will have in your overall payment record, but it is the only debt free (non-loan) payment you can make that ends up on your credit report.
The VantageScore is the first tri-bureau score to include rent payment history in its calculation.
Through the addition of on-time rental payments, one in three consumers falling in the lowest rung of Experian’s VantageScore credit scoring model (receiving a letter grade of an F and scoring between 501 and 600) will move up to at least the next level (with a D-grade and a score between 601 and 700), according to Experian*.
Younger adults or adults with limited credit history have the most to gain, but the rent amount and length of rent history reported will also influence each person’s specific credit score.
Rent reporting also allows consumers who previously did not even have a credit profile or history (referred to as ‘thin files’ in the credit reporting world) to establish a new credit profile that future potential lenders can use when extending credit. This is extremely beneficial for college students and anyone without a credit card or credit history.
There are numerous benefits with online rent payments for both residents and property managers: convenience, efficiency, flexibility, timeliness, integration with accounting software… ultimately streamlining the rent payment process for all involved. While many companies have facilitated online rent payments for years, only about 10% of the U.S. pays rent this way - most still send paper checks in the mail.
Rent reporting is new, but is starting to gain traction. Furthermore, rent payment services that offer this benefit let you report your rent payments to the major bureaus for free. For the tens of millions of Americans who rent, this is great news considering rent is often one of the largest expenditures in their budget.
As rent reporting picks up steam, we think a virtuous cycle will develop:
- As the major credit bureaus continue to record rental payments by teaming up with property managers and online rental payment services then...
- More companies will start reporting rental history, signifying that more companies are using that rental history as part of measuring consumer credit-worthiness which means…
- More scoring models will include rental payment history when calculating credit scores and as a result…
- More consumers will demand that property managers be able to report rent payments to credit bureaus.
Soon, sending a rent check in the mail will be thing of the past. TransUnion’s analysis found that “the majority of the overall renter population could also benefit from having their rental payments reported.” This is an exciting finding, and aligns with our belief that soon every renter will be paying online using rent-reporting services like RentTrack.
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