Rent payments are usually a tenant’s most significant expense, but they’re not traditionally represented in Americans’ credit history.
However, this has changed — renters today can easily report on-time rent payments to the major credit bureaus so they can be used to improve their credit scores.
In this article, we’ll discuss the financial impact of a credit score and the steps renters can take to improve their credit.
The Importance of a Good Credit Score
An estimated 11% of the U.S. adult population is considered “credit invisible” — meaning they have no credit history — and an additional 8% are unscorable or have fragile credit files.
A lack of credit limits an individual’s financial independence by making it hard to access funding sources like credit cards, car loans, mortgages, and even rental units. Here’s how a low credit score or lack of credit history impacts a renter.
Landlords Prefer Tenants with Higher Credit Scores
As home prices continue to rise, more Americans are renting homes instead of purchasing property. This has put landlords in a position to be more discerning about the types of tenants they rent to.
As part of the rental application, landlords often ask prospective tenants for references from previous landlords, proof of employment, and credit checks.
Without a solid credit history, it’s difficult for tenants to reassure potential landlords that they will pay their rent on time.
Poor Credit Scores May Mean Higher Security Deposits
Security deposits are commonly required at the start of the lease to cover any missed rent payments or potential damage caused by tenants during the lease term.
To protect their investment, landlords may require renters with poor credit scores to pay higher security deposits — meaning the up-front costs of moving into a new apartment are even high.
Renters with excellent credit scores may also have the advantage of negotiating lower security deposits for long-term rentals or even lower rent.
Better Credit Leads to Better Financing Options
Young individuals often rent in the early stages of their career to maintain flexibility and minimize significant expenses — and because they don’t yet have a credit history.
Tenants who take steps to build their credit scores early on can eventually finance a home purchase in the future.
Good credit improves the chances of getting approved for loans and credit cards of all types. Individuals with high credit scores are considered lower-risk borrowers and have better negotiating power when it comes to getting favorable interest rates and loan terms from lenders.
3 Ways Renters Can Improve Their Credit
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Use a Rent Reporting Tool
Rent reporting is creating reports of rent payments to the major credit bureaus (Equifax, Experian, and TransUnion). It’s a new strategy for renters to improve their credit when they don’t own a home or have other opportunities to build equity.
There are several relatively low-cost rent reporting tools available for tenants, so find one that makes sense for you and your landlord. The effort will pay dividends — one Experian report suggested that reporting rent payments improves credit scores by up to 29 points.
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Pay Rent on Time, Every Time
Once you’re reporting your rent, it’s important to pay rent on time to improve your credit score and remain in good standing with your landlord.
Even missing payments once in a while or during periods of economic hardship can affect credit scores if they’re more than 30 days late.
Once a late payment is reported to a credit agency, it stays on the renter’s credit report for seven years — even if all payments after that are made on time. Regular offenders are likely to have their credit score affected enough to limit their rental options for future leases.
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Monitor and Dispute Credit Report Mistakes
Even when renters make payments on time or within the grace period offered by credit bureaus, uneven or delayed processing times can lead to mistakes being placed on tenants’ shoulders.
Therefore, renters must look through their statements and credit reports to ensure mistakes are rectified immediately and that the appropriate companies are informed of the error.
This can prevent inaccuracies from showing up on credit reports and can help renters save time and energy if they don’t find it until later.
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Complement Rent Reporting with Other Credit-Boosting Strategies
Rental payments can give tenants a good credit boost, but these aren’t the only arrow in their quiver. Always pay your bills on time, and don’t spend beyond your means.
Regular usage and on-time payments of credit cards are other simple ways to improve credit scores.
Why Should Landlords Help Tenants Use Rent Payments to Boost Credit Scores?
Renters Are More Likely to Pay Rent on Time if Payments Are Reported
Recent research shows that 15% of renters in America are behind on rent payments. This impacts cash flow for landlords, so it’s in their best interest to find ways to incentivize paying rent on time.
Statistics gathered by Experian revealed that almost three-quarters of renters are more likely to pay rent on time if their payments are reported to credit bureaus.
This is especially true for younger renters who are in greater need and have less available avenues to build credit.
Younger Renters Prefer Units That Offer Rent Payment Reporting
While landlords can be discerning in choosing the best tenants, these renters are also in high demand. Landlords, like tenants, must show they are collaborative and willing to help renters where they can.
If given a choice between identical rental units, 67% of renters would choose the one that offers rent reporting. Good quality tenants are always highly sought after, and offering rent reporting increases the chances of finding a tenant who pays rent on time.
Improving Credit Scores with Rent Reporting
Americans depend on good credit scores to apply for credit cards, get financing for large purchases, improve rental options, and much more.
Rent payments form a significant part of most American renters’ regular expenses, and tenants can leverage rent reporting as an affordable and simple way to build credit.
About the author: The article on How to Use Rent Payments to Boost Your Credit Score was written by Mike Bang. Mike is Head of Growth at Azibo, the one-stop-shop financial services platform for rental properties, providing a world-class platform for rent collection, banking, lending, insurance, and more.