According to a recent article from Lauren Gensler of Forbes, a new development in the credit industry could lead to increases in credit scores for millions of Americans who pay their rent on time.
For as long as credit scores have been around and Americans have fretted about them, the three-digit number has ignored what for many is their biggest monthly expense: rent.
A cruel and longstanding reality about credit is that people often don’t get rewarded for good behavior, but do get punished for missteps. For example, there’s traditionally been no benefit to always paying rent on time, which is a surprise to many. Yet, if someone were to stop paying their rent (say, because of a dispute with a landlord) and it goes into collections or their landlord takes them to court, you can bet that information will find its way onto their credit reports and bring down their score.
This isn’t terribly helpful for anyone involved, since someone might have a worse credit score than they should and lenders don’t get the whole picture.
Things are starting to change. A new development in the credit industry means that millions of Americans could see their credit scores rise from paying rent on time. The powerful, mammoth credit industry is on board with factoring rent into credit scores and companies are sprouting up to help make this happen. However, what stands in the way from America’s renters benefiting en masse is the nation’s extremely fragmented rental market.
The inclusion of rent in credit scores can be particularly helpful for the 53 million “unscorable” people in the U.S., often recent college graduates, immigrants or people who don’t have any credit cards or loans. For them, having rent info on credit reports could mean the difference between having a credit score and not having one, since Fair Isaac Corp., which produces the widely-used FICO score, only requires one active account to generate a score. It can also be particularly beneficial for people who are working to build better credit history. With rent reporting, eight in 10 renters with a credit score below 641 points saw their scores increase just one month into a new lease, according to TransUnion.
So it was a big deal last year when Fair Isaac said it would factor rent data into its newest model (FICO 9) for the first time ever. It joins VantageScore, which also creates credit scores, in looking at rent payments.
“We were looking for evidence that we moved closer to complete, full reporting of rental information, both positive and negative data alike,” says Ethan Dornhelm, who is the principle data scientist for FICO scores. “Formerly we saw a stronger skew toward negative information…and it almost felt like we were getting a very one-sided picture of this particular type of credit,” he says.
Yet, what kept FICO from factoring in rent history before remains a big problem today. Rent info has to be on your credit reports – you have one from each of the big three credit bureaus, Experian, Equifax and TransUnion – before it can be calculated into a score.
“To the extent rent history is available, it will be factored into the FICO 9 credit score equation,” says Dornhelm. “However, this is not widely available in credit reports today and so has relatively little influence.”
Herein lies the rub – and what could prove to be the biggest hurdle to incorporating rent payments into credit scores.
It doesn’t do your credit score any good when only you and your landlord are aware you pay your rent on time every month. This information has to make it to the credit bureaus, too. And that is easier said than done, largely because in the U.S., mom and pop landlords rule. In fact, individuals own 71% of the nation’s rental properties, according to the National Multifamily Housing Council. It’s hard to collect information, on a monthly basis, from millions of little landlords all over the country. You might even call it a logistical nightmare. And for the time being it’s just not happening in any meaningful way.
