Updated By Richard Barrington
Your credit score is based largely on your bill-paying history; and if you're like most people that rent, it is your largest monthly payment. So does that mean rent payments affect your credit score?
A survey conducted by TransUnion found that nearly half of renters mistakenly believed that their rent-payment history was automatically reported to credit bureaus. That's not true, and that's too bad -- TransUnion analysts concluded that nearly 80 percent of renters would benefit from the inclusion of their rent-payment history.
Credit histories and scores are compiled by the three major credit-reporting agencies: Experian, TransUnion and Equifax. The impact of rent on your credit score depends both on your landlord and on which of the three major credit bureaus is involved.
Credit bureaus began to incorporate rental history into credit reports and credit scores in 2011, and landlords have increasingly been sharing their data ever since. But this is by no means a universal practice among landlords. If your credit report doesn't reflect your rent-payment history, it won't have a chance to affect your credit score either. And that may be because your landlord doesn't report payments to the credit bureaus.
Does paying rent help build credit?
It is important to pay attention to your payment history, especially if you're trying to establish credit for the first time or working to rebuild a damaged credit history. But does paying rent help build credit?
It may, but it's not a given.
All three of the major credit bureaus include rent-payment history in credit reports if they have it. Experian and TransUnion both have formal arrangements with services that gather and report rental-history data, and Equifax will include this information if landlords choose to report it.
That's a good thing, because your history of making timely payments are treated like an auto loan on your credit report if the length of your lease is defined; if your lease is month to month, your payment history is treated more like a credit card account. Either way, you are more likely to be seen as creditworthy with a good rental history on your credit report. And this may give you an opportunity over another candidate, which could in turn help you continue to build credit down the road.
But credit bureaus offer a number of different credit-scoring models among their products, and they don't necessarily include rental-payment history in their calculations. For example, Experian incorporates this information into its VantageScore product, but some versions of the FICO score do not. It's up to the landlord or business that is evaluating your credit to decide which rental-screening product they use. Different businesses check with different agencies when evaluating credit, and some may check with more than one.
Landlord participation in rental-reporting programs is on the rise because that encourages tenants to make their payments on time. As a tenant, it may be to your advantage to check with prospective landlords to see if they report rental-payment history to a credit program because this can determine whether paying rent will help you build credit.
Can rent payments be reported to credit bureaus?
The good news for renters is that a solid rental-payment history can help you build -- or rebuild -- your credit score, particularly after a financial hardship such as a foreclosure or bankruptcy. The bad news is that you can't exactly report your payment history to the credit bureaus yourself.
However, there are now a variety of services that claim to report your rental payments to credit bureaus, for a fee. But before you pay to establish a credit history in this way, be aware that not all of these services have legitimate reporting relationships with the big three credit bureaus.
Dave Blumberg, a spokesperson for TransUnion, explained to HSH.com that you should be cautious when registering with these companies. "Regarding being a data-furnisher to a national credit reporting company," he says, "there are strict reporting guidelines outlined in the Fair Credit Reporting Act (FCRA) that they must follow to be a data provider." He also noted that TransUnion does use qualified, alternative data sources in its proprietary scoring models.
Do not pay anything to any of these credit-reporting providers unless it can prove it is an approved FCRA data-furnisher operating under these strict rules, and that it reports to at least one of the major bureaus.
If you go to the trouble to make sure you find a landlord or a credit-reporting service that reports to one or more of the major credit bureaus, take care to follow through by making your rent payments on time. Having your payments reported means that they are part of the credit history you are building. It's up to you whether that becomes a positive or a negative history.
Raising your credit score can save thousands
How important is it to build credit? Even for very common forms of credit such as a credit card or car loan, the lender is likely to refer to your credit score to determine whether or not you qualify and, if so, what interest rate you are going to pay. The better your credit score, the more likely you are to get credit and the cheaper that credit is likely to be.
The stakes become even higher when it comes time to move from renting to being a homeowner.
If you are applying for a conventional mortgage, which is a loan backed by Fannie Mae or Freddie Mac, you may not be offered the lowest mortgage rates if you do not have an excellent credit score.
Read: 8 ways to increase your credit score to get the lowest mortgage rates
Your credit score is the mortgage lender's barometer of your creditworthiness, and your payment history counts for 35 percent of that all-important number.
Even beyond your credit score, your rent-payment history may factor into your ability to get a mortgage. Whether you are applying for a conventional mortgage or a home loan backed by the Federal Housing Administration (FHA), underwriters are more likely to check your rental-payment history now -- especially if you haven't established credit in other ways such as by paying down a car loan or credit cards. Also, with many first-time homeowners entering the market, applicants often don't have previous mortgage payments in their credit histories. Therefore, rental-payment history has become a more important aspect of credit profiles.
In fact, the FHA's handbook says that housing payments (along with utility payments) are at the top of the food chain when checking a borrower's creditworthiness. Fannie Mae's guidelines are similar for applicants who have not established a traditional credit history: mortgage loan processors are directed to get either a statement from your landlord (if your landlord is a management company) or 12 months of canceled checks from you.
Both FHA and conventional mortgage lenders consider borrowers a greater risk if they have any late rent payments in the preceding 12 months.
With today's risk-based pricing, your credit score is more critical than ever to getting an affordable mortgage and minimizing lender fees. If your credit score is on the cusp, even a one-point increase could save you thousands. If you are renting now with hopes of buying a home in the future, check your credit history and score and take steps to ensure you are paying your rent on time.