But no more.
Rental payments, especially, are now joining with credit card, auto, and mortgage payments as key indicators in credit agency scoring formulas.
The shift toward on-time rental payments and improved credit scores, a trend that has really accelerated in the past year, is making a big difference. Experian notes in a recent study that before it included rental payments in its scoring formulas, 11% of select U.S. renters it tracked weren't even included in credit scoring, as they had no credit file. "But as a result of adding the positive rental tradelines, these same individuals now are scoreable and eight out of ten of these former no-hit individuals now had more than 12 months of rental payment history data in the Experian RentBureau database," Experian states. "These residents now would receive credit for not just one positive payment, but for months of responsible, on-time payments, and now would be able to leverage the existence of a credit file and build a credit history."
Another recent study, this one from Santa Barbara, Calif.-based Rent Track, shows that consumers with two months of rental payments included their credit scores saw their scores rise by 9%. Better yet, subprime consumers with the same payment experience saw their scores rise by 29 points.
"This is a paradigm shift that every renter should take advantage of, especially students and those who are just starting out," says Matt Briggs, chief executive officer at RentTrack.
Other financial professionals agree, urging renters to learn all they can about their monthly housing payments and credit scoring models. "Whether you have been a renter for a number of years or are just starting to look for your own place, know that rent payments can have an impact on your credit score," says John Heath, directing attorney of Salt Lake City-based Lexington Law. "In some instances, a landlord won't report your rent history to the credit agencies. But there are many that value this resource, as a credit report can be a useful tool to inspect tenants' financial responsibility."
Rental payment history can show up on Experian and TransUnion reports, but your landlord must report the data to them, Heath adds. "Sending in your check even a few days before the due date can help you maintain your positive history and increase your score at the same time," he says.
Heath also advises renters to know that landlords can only look at your credit report if you give them permission. "This information show up when your rental history is being accounted for, and it will show up on your report like an auto loan in your have a lease with a contractual obligation," he says. "If you pay month to month, this will be reflected on your report like a charge card or a tab. One of the widely used scores, VantageScore, is starting to incorporate rental history into its model, and the information could show up on other scores as well."
Some lenders are catching on and are plugging in to rental scores when making credit decisions. "When trying to get financing for a home loan, rental history is extremely important," says David J. Hosterman, branch manager at Denver-based Castle Cooke Mortgage. "In many cases clients have limited credit on their credit reports, so we take into account what are called "alternative credit trade lines". These types of credit are anything from rental history, car insurance, utilities, monthly subscriptions services, cell phone, and other payments."
Hosterman says that when he sees customers with alternative credit, the mortgage firm looks for a pattern of good credit with those companies for a period of 12 months or longer. "In reference to rental history and all 'alternative credit trade lines,' we like to see 12 months' canceled checks or 12 months' bank statements showing payments to those companies," he says. "In addition, for rental history we request the landlord to fill out what is called a 'verification of rent' or VOR."
"This allows the landlord to provide information such as current rent amount, is the rent in the arrears, number of later payments over 30 days, is account satisfactory, length of time for tenant," he adds. Renters should push landlords to file this document, which is also signed by the renter and is an effective way to tie on-time rent payments to stronger credit scores.
While some lenders and property firms are starting to see rental payments factoring into credit scores, there are mortgage brokers that seem to be late to the party but who do see the value of rental payments when making loan decisions.
"I've been a mortgage broker for over 20 years and I've never seen a rental history on a credit report, therefore there is no way to increase or improve one's credit report or score by paying your rent on time," says Denise Panza, a broker with Prysma Lending Group in Danbury, Conn. "However, it's always a terrific compensating factor in the mortgage world if you can either show 12 canceled rents or a verification of rent from a management company if your loan application needs compensating factors."
Oftentimes if a client has limited credit, Panza will have the rental history added to the credit report via a credit supplement to build credit, but it will not report monthly and will not affect the credit scores.
There you have it, apartment and house renters - your credit score can be improved using your monthly rent payments. That wasn't the case in the past, but it's increasingly a big factor in determining credit scores, to the benefit of millions of U.S. renters who could use a financial break or two when looking for credit down the road.