Does Rent Affect Credit Score?
Does timely payment of rent enhance a person's credit score?
Credit reports and scores are the key indicators of your financial life. Employers, landlords, credit card companies, auto loan companies, banks, and even insurance companies use your credit score to determine whether or not you are worthy of being issued with credit card, an auto loan, a mortgage or even being hired for a job or renting an apartment. Well, you want to build up the highest score possible. One of the most frequently asked questions is whether timely rent payment has a positive impact on credit score. The short answer to the question is yes, but it is not a direct connection. Here is a closer look at how rent payments can affect credit scores or vice versa.
How do Credit Scores work?
Now, let me explain the general concepts before focusing on rent alone Some aspects influence the credit score. The most widely known credit score is from FICO. Credit scores vary from 300 to 850. In general, the higher the better when it comes to interest rates and the likelihood of getting a loan. FICO calculation is done on the credit reports of the three credit bureaus which include Equifax, Experian, and TransUnion.
FICO scores weigh five main factors.
Payment history Negative 35 percent Credit utilization 30 percent Number of accounts: Length of credit history - 15 percent. Variety of credits - 10 percent New credit applications 10 percent
As you can notice, payment history is about more than one-third of a FICO score. But it's only the payments on the loan, related to certain kinds of accounts such as credit cards, auto loans, student loans, and mortgages. Your history of paying rent or utilities is normally not reported in your credit reports and hence FICO scoring does not consider them.
Possible Benefit of Rent Reporting
Since rent is not an account that will be reported to the credit bureaus, just paying it on time will not affect credit. Nevertheless, rent has ways of influencing your credit report without necessarily appearing on it. The only way to do this is to make use of rent reporting services provided by a still limited number of property managers. The implications of rent reporting mean that the payments will appear in your credit reports as loan or credit card-like information.
However, in its current state, in 2022, most of the big rental marketplaces and property managers do not directly report tenants’ rent payments to credit bureaus. Yet it is turning into a more frequent practice. The data obtained from TransUnion reveals that the ratio of landlords in the United States reporting on rent has increased by more than double between 2018 and 2021. Because rent is such a large monthly cost for many people, establishing several years of consecutive timely payments on your credit reports can significantly bolster your credit history. This is particularly helpful if the credit reports contain minimal other accounts showing that you have been a good tenant by paying your rent on time. It just makes it diverse and enriching to show how they were managing their finances responsibly for the long term.
In addition, some of the landlords that report rent information to credit bureaus use services that give you a chance even if they do not directly report to the credit bureaus. For instance, RentTrack and Rock the Score acquire payment information from property managers to update people's credit reports, and for this, they charge.
Possible Negative Consequences of Unpaid Rent
The other side of the rent and credit score relationship is the negative information that is recorded when you fail to pay rent on time. While most landlords and property management companies do not automatically report timely rent payments to credit agencies, they have the authority to report negative information such as non-payment of rent on your credit reports.
In cases where tenants are significantly in arrears and there is no clear plan of how the issue will be sorted, landlords and property managers will often pass the account to a debt collector. If it reaches this stage and the unpaid rent is reported to the credit bureaus as a collections account, your credit scores will take a big hit. An account in collections can cause a FICO score to drop well over a hundred points. Such a drop in scores indicates that an individual cannot easily access any form of credit or loan for a while.
Ways of Rebuilding Your Credit Based on Rental Payments In conclusion, therefore, timely payment of rent shall not help to raise your credit score. However, there are some roundabout means by which responsible tenancy can have a positive impact on your credit scores. Here are some tips:
Search for apartments and rentals where the landlords pay
When transferring your vehicle, ask whether the new company offers information to credit bureaus. As time goes on and you renew leases, the reported rent payments will keep on providing good information to the credit reports. You establish a payment history with yet another type of account. This kind of diversification and lengthening of your credit history is beneficial for credit scores when done frequently.
Create a rent payment history through RentTrack or Rock The Score.
If your landlord does not report rent payments to credit bureaus, some services enable the tenant to report the payment history on their own. Their verification systems link to landlord databases, so the rent details are direct from landlords but you see them on your credit reports when reporting is done by these companies. People usually have to pay for rent reporting services every month.
It is advisable to ask your current landlord to report.
You may not be aware that your property company or landlord can report your rent payment to credit bureaus since you make your payments on time every month. While some may not already report for all tenants, individual landlords or property managers may be willing to accommodate special arrangements to report one tenant's rent.
They should pay rent on or before the due date every month, thereby being a responsible tenant.
It does not allow for your landlord to send a negative rent payment report to the credit bureaus in the future in case you fail to pay your rent as agreed. This information can be easily found in the rental agreement you signed with the landlord and details the exact amount and date by which it is due. If this is not convenient you can make arrangements to make the payments automatically through your bank so that you do not default.
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