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Does rent reporting really improve your credit?
Rent reporting to build credit history is kind of a no-brainer, to renters. Yet, traditional credit scoring models such as FICO 8 (the most widely used credit score to determine creditworthiness) does not include rent payments in your credit score calculation.
Which begs the question, does rent reporting really improve your credit score? The answer is yes it can. But there are a few drawbacks that, as long as you are aware of the benefits, and the limits, of rent reporting, it can be very much worth your time and money to invest in building your credit history with rent reporting.
The benefits of reporting your rent to credit bureaus
Rent reporting can increase your credit score
If your landlord or a reporting agency is reporting your rent payments, and you make your payments on time, it may increase your credit score by an average of 29 points.
Payment history makes up 35% of your FICO score, so just adding a positive payment history through rent reporting can help increase your score. Here are just a few of the benefits that increasing your credit score can give you:
- Better interest rates on personal/car loans
- Lower insurance premiums
- improved ability to qualify for loans or credit
- Easier approval to rent
- Access to larger loan and credit amounts
Build a positive relationship with your landlord
Showing your landlord that you are serious about your financial commitments is a great way to build a positive relationship with them. And, knowing that each payment may count towards your credit score, they may feel that you’re even more likely to pay rent each month on time. Landlords definitely appreciate that.
Established good rent payment history
Your on-time rent payments will be well-documented for property managers to see when they pull your credit history for a rental application.
It just feels good to get rewarded for something once in a while rather than being punished with credit dings. And, that sense of accomplishment and forward momentum goes a long way towards feeling empowered and taking control of your financial life, and there ain’t nothin’ wrong with that.
The cons of rent reporting
Traditional FICO scoring models don’t include rent payments
FICO 8 scoring models include rent payment history on your credit report but that doesn’t necessarily mean that it’s used to help calculate your actual credit score. Confusing, right?
Most FICO models don’t feel that rent payments are predictive of your future risk-worthiness because even if you’re making your payments on time you’re not responsible for a debt burden.
Newer models such as FICO 9 and FICO 10 have taken a different approach and do include your rent payments in your credit score calculation. The catch here is that many behemoth banking institutions are incredibly slow to adopt anything new, so it may take some time before they use the newer FICO models as part of their decisioning process.
The drawbacks of rent reporting agencies
Your rent payments can be reported to credit bureaus by either your landlord or by a reporting agency, such as Esusu. If your landlord can’t or won’t report your rent payments for you, you need to have a rent reporting agency do it for you because you cannot report your own payments.
There are many reasons why you need to shop carefully if you’re thinking about using a rent reporting agency. A few things to consider:
- Not all rent reporting agencies report to all three credit bureaus — TransUnion, and Experian, Equifax. Try to find a company, like that reports to at least two because it will give you the best chance of seeing your score improve. Hot tip! Roost’s rent reporting service reports to all three credit unions, hooray!!
- Companies like Rent Reporters will actually remove your rental history from your credit report if you cancel your contract with them. (Hmmm…we don’t like that.)
- Some rent reporting agencies can be expensive. Many charge a one-time fee for starting the service that can range up to almost $100, and then you will be charged a monthly fee of $5.99 – $9.95.
Are there faster ways to improve my credit score than rent reporting?
There are other ways for you to start building your credit score that don’t require paying a rent reporting agency.
Open a checking account
If you don’t already have a checking account, open one up. Checking accounts won’t contribute to your credit score, but they will help you build a relationship with a bank.
An account in good standing will help your chances of getting approved for a line of credit with that bank as a valued customer.
Secured credit cards
Secured credit cards look and feel very much like traditional credit cards. The biggest difference is that you agree to pay a cash deposit upfront to guarantee your credit line.
Think of it like a ‘security deposit’ that acts as insurance for the bank if you miss a payment. The best way to use these cards is to make small purchases and then pay off the balance each month.
Another option for people trying to build credit is to ask someone with a good credit history to cosign a loan with you, like your parents or a spouse. Your loan payments will then go towards building up your good credit history.
Part of building up an excellent credit score involves constant care and management. If you take care of it, you will see the benefits as that number keeps getting higher.
Check out our article, How to repair your credit when it’s really bad, for more tips on working on your credit score.
What is a VantageScore 3.0 credit score?
We already mentioned that FICO scores generally don’t include rent payments as a part of your credit score, even though the rent payment history shows up on your credit report.
But what many people don’t know is that FICO is not the only credit scoring company out there. VantageScore is also a credit scoring company, and they do include rent payments in calculating your credit score. (Whoo hoo!)
Currently, upwards of 2200 financial institutions and 10 out of 29 of the largest banks use VantageScore 3.0. That being said, the FICO score is still used by 90 out of 100 of the top 100 biggest lending institutions. And unfortunately, you don’t have any control over which credit scoring service they use when evaluating your creditworthiness. (Grrr)
What’s the difference between FICO and VantageScore 3.0
Aside from slightly different scoring ranges, the most significant difference between the two is what factors are weighted more heavily in your score calculation. This table lays them out side by side — the top being the most important and the bottom having the least effect on your score.
|FICO 8||VantageScore 3.0|
|Factors that influence your score||Payment history||Credit utilization*|
|Credit utilization*||Credit mix & experience|
|Credit age||Payment history|
|Credit mix||Age of credit|
|New appliances & hard inquiries||New accounts opened|
One of the advantages of the VantageScore 3.0 is that they don’t require an account to be open for a certain amount of time before they start counting it towards your credit score. This is a benefit in rent reporting because it can have an immediate impact on your credit.
Should I pay for a rent reporting service?
If your credit score is suffering from any number of issues, like a lack of payment history or just a lack of any type of credit, paying for rent reporting can be a great idea. You’ll be showing fiscal responsibility and in the long-run, save yourself money as your score increases and your access to better financial products increase.
It’s always a good idea, however, to remember that rent reporting should be just one out of many approaches to build your positive credit history; from getting payments caught up to getting errors removed from your credit reports, these are all important parts to a well-rounded credit strategy.
“Because rent reporting isn’t done by default with any of the credit bureaus and thus will not end up on your credit report, you’re really subject to the whims of lenders. Yes, even with rent reporting services. No laws mandate that any lender needs to look at a specific reporting agency, let alone one that isn’t officially recognized. That said, rent can be a good way to show financial responsibility. If you’re young and your credit file is thin, it’s not a bad idea to invest in rent reporting services as they may help you get approved for things that will actually contribute to your credit score.”
Carter Seuthe, CEO, Credit Summit
Check here for tips on how to shop for a rent reporting service.
As we mentioned above, always check with your landlord before looking into a rent reporting service because they may already be doing it for you or work with a service like Roost, at a reduced cost compared to other rent reporting services.
The catch 22 of credit
You need credit to build credit. It’s a frustrating dilemma for many renters.
Without credit, many renters experience financial exclusion from mainstream financial products and services on a daily basis. They manage their finances primarily on a cash basis in a world that is increasingly “cash unfriendly” and pay premium prices for everyday services like utilities.
Credit scores can be increased by an average of 29 points through rent reporting, which is really helpful when you are starting from a very low score. Together, with other strategies of creating and building a positive credit history rent reporting is becoming an important tool for renters to improve their financial circumstances.
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