How Credit Bureau Scores Influence Home Buying
In the mortgage world, credit is huge. Its the most integral factor when it comes to lending. Of course, there are a lot of considerations when it comes to mortgages, but the foundational factors lenders look at are income and credit.
Mortgage lenders look at credit scores in tiers. Using mortgagecalculator.org in June of 2020, we are able to provide a broad representation of how ones credit score can directly impact dollars spent or saved. Keep in mind that APRs change constantly, so these numbers may no longer be perfectly accurate. The purpose of this chart is to help paint a general picture.
This table assumes a home value of $500,000, with 20% down, and a 30 year loan term.
Looking at that table, the difference in total interest paid over the length of the loan can add up to over one hundred thousand dollars depending on credit score. Using a tool to report rent payments to credit bureaus could potentially save someone tens or even thousands of dollars down the road. Thats one heck of an ROI. Everyone should be making that investment.
But thats not the only mortgage-related benefit. Rent payment reporting also speeds up the lending process. If theyve been using a program to report rent payments to credit bureaus, the mortgage lender will be able to see their rental payment history directly on their credit report.
Do Rent Payments Affect Credit
All three major credit bureaus Equifax, Experian and TransUnion will include rent payment information in credit reports if they receive it.
The most commonly used versions of the FICO score dont use rental payment information in calculating scores.
It Can Affect Your Finances
Financial institutions look at your credit report and credit score to decide if they will lend you money. They also use them to determine how much interest they will charge you to borrow money.
If you have no credit history or a poor credit history, it could be harder for you to get a credit card, loan or mortgage. It could even affect your ability to rent a house or apartment or get hired for a job.
If you have good credit history, you may be able to get a lower interest rate on loans. This can save you a lot of money over time.
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How To Report Tenant Payments To The Credit Bureau Directly
While many landlords would prefer to avoid the cost of rental payment reporting by reporting it directly, this is not possible at this time.
You must use a third-party reporting site to get this information to the appropriate parties. For now, youll have to stick with this system!
Landlord Tip: Search for local collection agencies or attorneys that specialize in debt collection. Be sure to ask specifically if they report to the credit bureaus. Most agencies and attorneys work on a contingency basis meaning they get paid if they collect on the debt. This means there should be no out of pocket expenses for the landlord.
Your Options Will Vary Depending On What You Want To Report
There are a number of services available that allow you to proactively add information to your reports or self-report your data to a lender.
They all work slightly differently and use different information to bulk up your financial profile. Experian Boost, for example, zeroes in on your cable, phone and utility payments. UltraFICO pulls an even wider variety of information from your account, including your cash flow, spending habits and account history.
Meanwhile, rent reporting services, such as Rent Reporters and Rental Kharma, will relay your on-time rent payments on your behalf.
Alternatively, you can work directly with a lender that uses alternative data and link your bank accounts so they can assess your transaction history. Or, you can use a nontraditional score service, such as PRBC, and ask a lender to consider it.
Depending on your goals and financial history, you could even use multiple alternative data reporting services to showcase your financial history.
If youre confident that giving lenders a more comprehensive view of your financial situation will help give you an edge, rounding out your financial profile with alternative data could be really useful especially if your credit history is thin or nonexistent.
Tip: In general, you cant remove accurate negative items from your credit report. And theyll stay there for up to seven years. But in some cases, black marks such as missed payments can be removed by contacting your creditors.
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Things To Keep In Mind
While reporting rent on your credit report sounds like a good idea for every payment on time, you can strengthen your score digging into how it actually pans out reveals some interesting caveats.
For example, a string of reddit posts discussing consequences of reporting rent payments reveal exactly how Experian reports them on a credit report. Reddit user flymd claims his credit score dropped 20 points one month after opting to report his rent payments to the bureau.
The only thing different I could find on my report was that it was now categorizing my rental payments as a brand new loan account with an age of < 1 month, which has significantly altered my average age of accounts and hit my score, flymd writes.
In a statement provided to Forbes, TransUnion explained exactly how rental payment histories are recorded on credit reports.
Rental payments are reported as portfolio type Open and account type Rental Agreement.. They show up in the tradelines section among all the other tradeline types . It will show up as a new account if it was not previously reported but may not be a new loan as rental agreements could have been open previously and are just now being reported on.
Emily Christiansen, director of Experian Rent Bureau, adds that a diversified credit report will benefit consumers in the long run, regardless of the initial dip.
Reporting Good Payment History For Renters Can Instantly Boost Their Credit Score
Did you know that if youve been making your rent payments on time that your by more than 40 points if that was reflected on your credit history?
Your landlord likely knows this, as do the credit bureaus.
A credit rent boost is fast becoming a trend. But it has yet to really catch on with the ones who need it most: Renters.
Does paying rent increase your credit score? Yes.
Greg Knotts, Continental Finance Blog
Most people know that building a strong credit history involves showing that they are a good candidate for credit or a loan.
One of the keys to showing this is to make payments on a credit card balance on time.
Other big payments like a mortgage or a car loan are also big indicators on a persons credit report.
But an on-time payment history of your rent is something many people never considered to be an indicator of good credit history.
Thats the thing though, paying rent on time is a great example of what a credit report from all three credit bureaus is looking for.
You can build credit history with rent payments. Ongoing reporting of your on-time payments helps establish your good record.
Chris Parker, executive director of Giv Development, told that rent reporting is a very useful indicator of a persons credit history.
They were the epitome of good credit risks, Parker told Herron.
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Does Paying Rent Build Credit
Simply paying your rent will not help you build credit. But reporting your rent payments can help you build credit especially if you are new to credit or do not have a lot of experience using it.
A 2017 TransUnion study followed 12,000 renters for a year as they reported their rent payments. Scores rose 16 points on average within six months after rent reporting began, according to the study. The largest increase was for scores below 620, which is considered bad credit.
Having rental payment information in your credit report can be useful if you rent again. Landlords prefer tenants who can show a history of paying on time.
But other strategies to build credit are more efficient than rent reporting because they influence all types of credit scores and usually report to all three credit bureaus. They also can cost less or, in the case of authorized usership, nothing.
You can become an on someones else credit card and benefit from their good credit history.
You can get a secured credit card, which requires a deposit and often serves as your credit limit.
You can get a at many credit unions or community banks. Your loan payments are reported to the bureaus and you get access to the funds only after you have paid it off.
Rent Manager Vs Rentdrop For Rent Payments In Conclusion
Finding the best solution to collect rent online doesnt have to be challenging. Two excellent rent collection apps are Rent Manager and Rentdrop.
RentManager is helpful if you are willing to pay a couple of hundred bucks a month for property management software to manage hundreds of units.
On the other hand, Rentdrop is free for landlords and tenants to use and makes all aspects of collecting rent easier. In addition, Rentdrops mobile app interface and online tenant portal are more straightforward for tenants to use.
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On Credit Scores And The Fico Scoring Model
The FICO Score helps lenders make accurate, reliable and fast credit risk decisions across the customer lifecycle. The credit risk score rank-orders consumers by how likely they are to pay their credit obligations as agreed. The most widely used, broad-based risk score the FICO Score plays a critical role in billions of decisions each year.
For example, it’s only been within the last five years or so that the most widely used FICO model FICO 8 achieved that distinction. There have been older models, such as the FICO NextGen score, that have never gained a wide following, Paperno said.
But Is It Really Worth Setting Up
Yes! Credit scores are being taken into account more and more. Landlords often like to view a prospective tenants credit report before accepting them. A poor score might persuade the landlord to reject your application, so why not put yourself in the best possible position? Find out more about what credit score is needed to rent a property here.
On top of this, some employers also request a credit report before hiring, in particular if the role involves dealing with money.
Whomever would like to view your report, whether Barclaycards or Bob the private landlord, they always have to have your permission first. This will normally be tucked away in the Ts & Cs or the tenancy application.
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Some Credit Scoring Models Already Include Rent Payments
Newer scoring models, such as FICO 9, FICO XD, and VantageScore do include reported rent payments in your credit score. The problem is that most lenders dont currently use the newest scoring models FICO 8 is still one of the most common models for lenders.
While some lenders actively seek borrowers with less than stellar credit, and therefore happily use reported rent payments, most prefer to use more traditional lending standards.
Some rental reporting companies help customers find credit card offers from companies who do consider rental history.
If youre trying to improve your credit scores, responsibly using a credit card is a good way to build up payment history on an account that is used in all scoring calculations.
Just be sure not to accumulate tons of debt because youll inadvertently end up damaging your credit history even more.
How To Start Reporting Your Rent Payments
Chat with your landlord to find out if they have a system in place for reporting rent payments. Some landlords might already offer the option to report rent to the credit bureaus and help you improve your credit.
If they dont, you can for a third-party reporting platform like CreditBoost and invite your landlord to collect rent online. Avail lets renters pay their rent with a bank account, debit card, or credit card, and once enabled, CreditBoost will automatically report all on-time rent payments that are made through Avail.
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Tenants Want To Know How To Report Rent Payments To Credit Bureaus
On average, tenants spend about 40% of their income on rent, and they want credit for it literally. Tenants realize that paying rent on time every month can raise their credit scores, and they are looking for landlords who report rent payments.
What is surprising about this trend is that tenants appear to have caught on to the benefits of reporting rent payments before landlords and property managers.
Reporting rent payments is a highly effective property management tool that dramatically increases on-time rent payments, and landlords should be the ones pushing for it. More on-time rent means less time spent chasing down tenants, collecting late fees, or filing evictions. Its what tenants want. By offering to report rent payments to credit bureaus Landlords and Property Managers can attract responsible tenants looking for this added benefit while rewarding their great tenants who consistently pay rent on-time.
What Does Experian Say
Clive Lawson, managing director of Experian Consumer Services, said: “We’re proud Experian is the first credit reference agency to add rental payment data to credit reports, leading the way in helping people understand their financial health. Tenants pay a significant amount of money each month for the roofs over their heads, so it’s right to recognise these regular payments in a similar way as mortgages.
“Adding rental payment data to credit reports would help millions of people prove their identity so they can access online services and mainstream finance. We’re already working with a range of lenders who want to use rental data to improve their understanding of a person’s financial situation so they can make higher quality decisions.”
Have Your Landlord Report Your Rent Payments
Your landlord is another source for reporting your rent payments. Companies like TransUnion accept rent payment information directly from landlords, but your landlord will need to sign up for one of the services and pay the associated fees.
Some landlords will be inclined to skip the extra effort of signing up for a reporting service, but reporting rent to a credit bureau actually helps encourage renters to pay their rent on time, since falling behind on multiple payments can lead to negative reporting and a decreased credit score.
Why Renters May Struggle To Establish Credit
Even for Tenants who always pay their full rent on time, Landlords have not had the means and tools to report rent payments to credit bureaus. This has deprived renters of a major opportunity to raise their credit score.
Today, more Tenants than ever are staying in the rental market. This is partly for lifestyle reasons and partly because of higher housing prices and tougher criteria for obtaining mortgages. Over time, these renters fall behind homeowners, whose mortgage payments get recorded by credit agencies. Many of these Tenants descend into a downward spiral of spending more and saving less, as they use much of their income to pay not only rent, but also the interest and fees associated with less desirable credit cards and loans.
But now, with support from Landlords, Tenants have a liberating new way to improve their credit score.
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How Can Reporting Rental Payments To Credit Bureaus Help Landlords And Tenants
For tenants, making on-time rent payments and reporting them is very helpful for those trying to build their credit scores or those working to repair them after going through difficult times.
Also, having a credit score is only possible if you have a credit history. Making rent payments and reporting them can help build this history.
For landlords, while reporting on-time rent payments is enormous for your tenant, it also shows your tenant that you care and are willing to support them in life by helping them increase their credit score.
Why help them in life? There are four reasons:
What Is A Tenant Background Check
A tenant background check looks into an applicants criminal and legal history to learn more about their past.
This type of tenant screening may also contain eviction history, sex offender registration status, and a credit report.
Tenant background checks provide helpful information to decide whether or not to rent to an applicant.
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