By Christine DiGangi
One of the many reasons someone might look at your credit scores is to figure out if you’re likely to repay any money you borrow, so you’d think having a history of paying a huge monthly bill on time would be good for your credit. But in many cases, one of the largest, most common monthly expenses — rent — isn’t factored into people’s credit scores.
That’s not to say your apartment can’t help you build credit. There’s an emerging trend to include positive rent history in credit reports and credit scores, and there are some steps you can take to make sure your monthly rent check contributes positively to your credit standing.
How Rent Can Hurt Your Credit Score
Historically, rent only affected people’s credit scores if they failed to pay it and the balance ended up with a debt collector. Collection accounts have a seriously negative effect on credit scores, so even though you may not get “good” credit for rent payments, you still want to make them on time to avoid a rent-related collection account.
How Rent Can Boost Your Credit Score
If your landlord or property management company sends the information to the three major credit reporting agencies, your rent payment history can show up on your credit reports. If it shows up in your credit reports, there are some credit scores that factor this information into their scoring models, including all VantageScore models and the most recent general version of the FICO score, FICO 9.
“Positive rental history can have a significant impact on a person’s score especially as it adds another account to those with sparse credit files,” Jeff Richardson, a spokesman for VantageScore, said. “For many consumers this can mean they can avoid having a ‘thin file’ which in turn can help them qualify for better terms.”
For example, this could improve the chances someone gets approved for a credit card their first time applying or can qualify for a lower interest rate on a loan. Traditionally, someone with little or no credit history would be limited to getting a secured credit card (meaning that they need to first deposit an amount equal to the credit line) or a cosigner on their first card.
That may sound great, but there’s a catch: A lot of landlords don’t send rental payment information to the credit bureaus, and even if they do, you have no way of knowing if a potential creditor will evaluate you using a credit score that considers rent payments. Much of the rent-payment data furnished to credit bureaus comes from property management companies or landlords that use electronic payment systems to process rent, so remember to ask your future landlord whether they report this information. If you’re dealing with a landlord who prefers old-school checks, you may be out of luck.
How to Get Your Rent Payments Reported
There are a slew of rent reporting companies you can use to get your rent reported to the credit bureaus, but there are a few things to consider before signing up. First, it’s up to your landlord to actually report your rent payment history to the rent-reporting service, so don’t pay money to sign up before confirming your landlord can and will do this. Beyond that, you will also want to ask about any fees associated with the service. You may have to pay just to sign up for it (or your landlord may have to pay and could pass that cost on to you), and some payment formats may require fees. Typically, there is a sign-up fee and then a monthly fee of $10 or so to keep the reporting going. In addition, if you have the option of paying your rent with a credit card, the processing fee may outweigh the rewards you earn on that transaction, not to mention the added expense of interest payments if you carry a balance on the card.
There are also tenant-specific credit reporting agencies a landlord may use, so while your rent payments may not affect your general credit scores, they could still be a factor in getting future rentals. Even if your rent doesn’t show up on your credit reports from the three main credit bureaus (Equifax, Experian and TransUnion), a future landlord may request review your reports to see how you’ve fared paying other bills or if you’ve had previous rent bills sent to a debt collector.
In addition to looking into rent reporting as a way to build credit, you may want to consider the traditional routes in doing so, like getting a secured credit card, applying for a credit-builder loan, asking someone to cosign a credit card with you or becoming an authorized user on someone else’s credit card. Carefully consider the pros and cons of each of these strategies — their costs and credit implications can be significant.
Christine DiGangi is a reporter and the social media editor for Credit.com, covering a variety of personal finance topics. Her writing has been featured on USA Today, MSN, Yahoo! Finance and The New York Times International Weekly, among other outlets. You can find her on Twitter @writingbikes.