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.
This is gaining even more importance since an increasing number of Americans are renting since the housing crash. In 2013, there were a whopping 43 million U.S. households that rented, according to the Joint Center for Housing Studies of Harvard University. This represents some 34% of all households, up from 31% in 2004.
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.
Instead, the real progress and promise lies with big property management companies. Unsurprisingly, working with giant corporate landlords is seen as the most effective way to funnel lots of rent info onto lots of credit reports quickly. "This is where you start getting massive amounts of information in a short period of time," says John Ulzheimer, a credit expert and former employee of Fair Isaac and Equifax.
Credit bureaus are ramping up their efforts to get these big landlords on board. Experian has been the most aggressive and since 2010 has sought out property management companies to provide this info. The effort has allowed it to double the number of credit reports with rental info on them from seven million to 14 million. TransUnion also launched a program last year to make it easier for property managers to report rent info to credit bureaus. While TransUnion declined to disclose any numbers, rent reporting is "getting some momentum...there's some work to do to make it easy and get it to really scale," according to Mike Doherty, senior vice president of its rental screening group. Equifax has been the slowest to act, but quietly partnered with a company in August that is actively providing them with rent info.
While rent reporting is in its early stages, there's reason to believe it can gain more traction. "It's monkey see, monkey do," says Ulzheimer, referring to property managers who he expects will want to do this once they see others doing it. The carrot and stick approach is appealing because it gives tenants an added incentive to pay their rent on time, something they should already be doing, or else get penalized. "We're headed in the right direction, but we're not there yet," says Ulzheimer.
This begs the question, is rent reporting unequivocally a good thing?
For many, it won't make a difference at all. Adding perfect rent payments to a credit report that already has a robust history of on-time credit card and loan payments won't have much impact, say experts. For others, who might have negative rent info, they could find their score is actually lowered.
"It depends on how it's done," says Chi Chi Wu, an attorney at the National Consumer Law Center who specializes in consumer credit. "The devil is in the details."
In some cases, only positive information will ever show up. For instance, Experian currently only includes positive rent information on credit reports. However, TransUnion will include both positive and negative information and Equifax is exploring doing the same. According to TransUnion, if you fall behind in paying your rent, suddenly the balance of what you owe your landlord will show up as a debt. This differs from the past when failing to make rent altogether might eventually wind up on your reports (perhaps because it went into collections), but paying late wouldn't. Now, with rent reporting, missteps would show up more quickly and with less fanfare.
Some consumer advocates say this could be problematic if someone has a leaky faucet, for instance, and they want to withhold rent so the landlord will come and fix it. Suddenly their credit is on the line. It could also be troublesome for someone who loses their job, for example, and has trouble paying rent. Now that information can be viewed by a potential employer.
It's also a reality that while the latest FICO 9 score factors in rent payments, and so do all three versions of the VantageScore, not all banks and lenders are using these. Not even close. In fact, over half of those using FICO scores are still on the previous FICO 8 score. The rest are using even older scores.
"It does take time," says Dave Shellenberger, FICO's senior director of scoring and advanced analytics. After all, the other FICO scores still work just fine.
Still, the bigger stumbling block is extending rent reporting to the squadrons of people renting from small landlords. Some companies are experimenting with services that empower renters to request rent reporting, but it still depends on their landlord's cooperation and most don't send the rent information to all three credit bureaus. RentTrack is one exception: it recently partnered with Credit.com to help renters get their rent reported and has a relationship with all three bureaus.
For now, the momentum will likely continue to come from the large property managers, which are increasingly passing along tenant rent info in bulk. For the renters in this cohort who are wondering if they have a choice in the matter, the answer is no. "It's not voluntary, you don't have a choice," says Wu.
Better go pay that rent on time.
