On-Time Rent Can Improve Credit
by Sarah Chenven and Maya Brennan
Credit scores have direct financial impacts for household budgets, and late housing payments cause damage. Yet historically, only homeowners could build a positive credit history with on-time payments. For renters, a positive rent history was invisible. As a result, renters’ credit histories typically present an incomplete and negatively skewed assessment of their risk.
Approximately 35 percent of US households live in rental housing. That percentage is even higher for families at the lower end of the income spectrum: renters account for nearly 60 percent of US households with income under $25,000 a year. Lacking opportunities to establish or build credit, low-income renters can be shut out of economic progress.
Credit scores affect more than just loan access or interest rates. A weak credit history can lead to a denied rental application, paying more for car insurance, needing a security deposit for utility or cell phone accounts, and a higher security deposit for an apartment. Weak credit can also limit job access. About half of employers check credit reports as part of their applicant screening. To ensure renters have the same chance to prove their creditworthiness as owners, this imbalance needs to be resolved.
With Experian, TransUnion, and Equifax offering a way to include on-time rent payments as valid trade lines on traditional consumer credit reports, renters can now benefit from on-time habits. This is particularly beneficial for low-income renters, who can build credit without taking on additional debt or incurring the burden of an additional monthly expense simply to have the payment appear on a credit report. The practice has spread, but has room to expand. Compared with nearly 112 million people in the United States in renter households, Experian had approximately 13 million residents in its RentBureau® database in 2015.
Rent reporting can also help landlords by adding an incentive for on-time payment and offering a competitive advantage in attracting credit-focused renters. A landlord who wishes to participate can either report the data directly or through a third party.
In practice, rent reporting is nearly always offered as a complement to a financial literacy or asset-building program in the affordable and public housing space. For example, in April 2015, Credit Builders Alliance (CBA) partnered with Home Forward, the housing authority for Portland, Oregon, to implement rent reporting for a credit-building program at the Stephens Creek Crossing development. Residents in Home Forward’s GOALS (Greater Opportunities to Advance, Learn, and Succeed) family self-sufficiency program could sign up to combine rental payment reporting with the credit education provided through the program, improving residents’ capacity to strengthen their credit profiles. The strategy is a natural fit with the multifaceted GOALS program, which supports residents in establishing and implementing a five-year self-sufficiency plan. To date, Home Forward has enrolled approximately 70 residents who can use their regular rent payments to support the economic progress they are making through the rest of the program. The housing authority expects to expand the initiative to reach more people in more properties.
Leading up to the work with Home Forward was CBA’s 2012–14 Power of Rent Reporting pilot, funded by the Citi Foundation, which catalyzed rent reporting for credit building for affordable and public housing providers. The pilot engaged Experian’s RentBureau®, eight pioneering housing providers, and 1,255 low-income renters across the country. By the end of the pilot, participants’ credit had improved. Seventy-nine percent of the 987 participants saw their credit scores increase by an average of 23 points with the addition of the rental trade line on the traditional consumer credit report. Every renter for whom too little information had been available to create a credit score became scorable during the program.
Housing programs can help expand this evidence-based mechanism for helping low-income renters build credit by learning more about implementation options, assessing their capacity and commitment to carrying it out, and contributing to the growing body of best practices.
Sarah Chenven is deputy director of the Credit Builders Alliance. More information about rent reporting for credit building can be found on CBA’s website.