Does Paying Rent Build Credit?
Building and managing your personal credit can feel like a daunting task, especially if you are just starting out. One of the difficult things about the process is that without a credit history, it’s hard to get credit- which is how you form a credit history. In order to raise a credit score, people will search for a range of ways to show they have a reliable payment history, and in some cases, rental payments can be reflected. If you are looking to qualify for a mortgage to pay for new construction in Davenport, FL, your rent payments may be an asset.
About Your Credit Score
A credit score is a number assigned to each individual in the United States, designed to indicate your risk when it comes to credit, or the likelihood that you will pay your bills on time. These scores are three digits and most often will range from 300 to 850, with a higher score representing less risk.
These scores are calculated using data in credit reports, including your payment history, the amount of debt you owe, and the length of your credit history. When lenders see a high score, it lets them know that you have a history of paying off your debts and do not have a huge amount you owe, which can make them more likely to give you further credit.
Each lender will have a different version of what a good or bad credit score is, but a common model used may look like this following:
- 300 to 579: Poor
- 580 to 669: Fair
- 670 to 739: Good
- 740 to 799: Very Good
- 800 to 850: Excellent
In addition to your chances of getting a loan, a higher credit score can also mean you get more favorable terms, like less interest and lower payments.
Credit bureaus receive reports on a recurring basis from any lenders, creditors, and credit card companies. This data is sent to three major credit bureaus: Experian, Equifax, and TransUnion. Not every bureau receives data from every creditor, but they are required to report it to at least one. For this reason, your scores may vary slightly. Many lenders will choose the middle score to determine eligibility.
Reporting Rent to Credit Bureaus
If rent isn’t reported to a credit bureau, there is no way for it to be reflected on your report. Major property management companies may do this on a regular basis, but if you have an independent landlord or small property management company, they likely are not doing so. If you think your rental payment history would benefit your credit score, you could ask if they would be willing to begin reporting.
Unfortunately, you cannot report your own rent to a credit bureau. Services do exist to report this information and some even partner with credit bureaus. Be sure to do research before signing up for these programs, and make sure you ask exactly what will be reporting and who will receive the information.
There are two ways that rent can be reported to the bureaus if you initiate it. You can report rent on an ongoing basis, allowing you to show a steady improvement in credit over time and establishing proof of long-term financial integrity. Many services will also offer a lookback, where you can increase your credit score by reporting on your past payments from up to two years prior. This is a good choice if you have little credit history or need to boost your score.
How Rent Impacts Credit
Rent payments can have an effect on your credit score in a number of ways, including some less traditional methods. This can be both negative and positive, depending on your payment history and your credit score.
The Alternative Method
In terms of credit, the Consumer Financial Protection Bureau (CFPB) classifies rent payments as something called alternative data. This category refers to “information used to evaluate creditworthiness that is not usually part of the credit report.” Other examples of alternative data may be cellphone payments, cable and internet bill payments, and bank account information.
This data isn’t as common as the traditional factors used to judge credit, like outstanding balances or hard inquiries. But federal agencies like the CFPB recognize that rent and other data can be useful and encourage companies to responsibly consider the impact.
Credit Cards and Rent Payments
Depending upon how your rent is paid, you may be able to use a credit card for the transaction, which would reflect on your credit report. If you pay your bill on time and pay the balance in full each month, this could allow you to reflect your rent as a positive factor.
Keep in mind that you may be charged an additional processing fee if you use a credit card, and if you do not pay it off, you will be incurring additional interest as well.
Credit cards should never be used to “float” rent payments. If you are having trouble keeping up with rent payments, there may be relief options available.
Rent on a Credit Report
If rent payments are being reported to a credit bureau, they will appear on your report as something called a tradeline. This is an industry term that simply refers to the account information on a credit report. Tradelines may include account information, payment history, account status, account activity, and account history.
All three major credit bureaus say they include rental payment tradelines in their credit reports, but this is only the case if they receive the information.
Effect on Credit Scores
When a credit bureau receives information about a rent payment, it can impact your scores in multiple ways. You have multiple credit scores, and they may vary based on what credit-scoring company calculated the score and what formula, or credit model, they used to do so.
In general, credit scores are based on factors like payment history, number and types of balances, credit use, and the age of accounts. But when it comes to rent payments, not every scoring model takes them into account. For example, FICO 8 is the most popular scoring model, does not include rent payments, while FICO 9 does.
You may also see that you have different scores depending on the type of loan you are trying to secure. Some types of lenders use a more conservative credit model because they are dealing with large amounts of money. For example, auto lenders may use a score designed to predict the likelihood that you default on a loan. Mortgage lenders use one of the tougher credit models.
Missed Rent Payments
It’s always advisable to stay up to date with your bills, including rent. You should understand what your lease agreement states in regards to late payments- when they are considered late, what fees are attached, when you are considered eligible for eviction, etc.
If you are far enough behind on rent, a landlord could go to a debt collector. Even if your rent payments were not previously reported, a collection will usually be sent to the credit bureaus and show as a derogatory mark that lowers your score.
Rental History When Purchasing a Home
Even if your credit score doesn’t reflect your rental payments, it is a factor most mortgage lenders will take into account. Most applications will ask for information on your most recent renting history and reach out to landlords to verify the information. This helps them see that you are trustworthy and able to pay a certain amount of money on a recurring basis.
You don’t need to be a current renter to be approved for a mortgage, but rental history itself can help. If your current or former landlord refuses to sign and return a form, this will not hurt you either. You can show canceled rent checks or a history of online payments as a way to verify the information to the mortgage lender.
This process also means that a poor rental history could still impact your mortgage search, even if you do not have it reported to the bureaus. Landlords are also more likely to report missed payments to a bureau, and anything that enters collections can be reported as well.
Other Ways to Build Credit
No one element of your finances will be the reason you have good or bad credit. Instead, it takes time and effort to cultivate responsible financial behaviors that reflect in your credit score. You do not have to take on a large amount of debt to do this- start with basic secured cards before working your way up to larger credit lines that you use sparingly.
If you are having trouble with your credit, you can consider asking to become an authorized user on a loved one’s accounts, using a co-signer, and finding programs that report alternative data.
When it comes to buying a house, rental payments are not given any more weight than other credit. Focusing on building your credit score as much as possible and demonstrating financial responsibility are the best ways to ensure you are approved for a home loan.
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