Credit Reports and Rent Payments: It’s About Time

Experian (one of the three credit-reporting bureaus in the U.S.) is starting to add rent payments to some of their credit reports. They began doing this in January, but it’s just now coming out in news circles. This is a positive sign for consumers, and one that is long overdue.

This means that renters who pay their rent on time could eventually see improvements to their credit scores. And renters who don’t have any other credit lines can establish a credit history for the first time. Previously, rental data was not reported to the credit bureaus.

In order for the payment history to show up on a person’s credit report, it has to be reported by a landlord. It will take time for landlords and property managers to realize this change. And even then, some of them won’t be inclined to report the on-time payments. Still, it’s a step in the right direction. Currently, Experian receives rent-payment information from about 8 million landlords. That number is expected to rise in the future.

Experian is one of the three major credit bureaus in the United States (see below). They are global corporation with headquarters in Dublin, Ireland. You might also know them from their FreeCreditReport.com and FreeCreditScore.com commercials. You know, the ones with all the singing.

Credit Reporting Bureaus 101

There are three credit-reporting bureaus in the United States — Experian, TransUnion and Equifax. Though they are commonly referred to as “bureaus” or “agencies,” they are actually private-sector corporations. They’re also heavily regulated by the federal government, through the Fair Credit Reporting Act (FCRA).

Why should you care about credit-reporting bureaus? Because the data they report has the power to make or break your chances of getting a loan. When a lender reviews your application for a mortgage or auto loan, they will check your credit score. These scores come directly from the information reported by the credit bureaus.

Here’s how the credit-reporting industry works, in a nutshell:

The Credit Reporting Process
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If you’re like most Americans, you probably got your first credit card when you were in your 20s. Maybe you got your first car loan around that time, too. Either one of these things would mark the beginning of your credit history. That’s because they both get reported to the credit-reporting bureaus: Experian, TransUnion and Equifax. Student loans, store credit cards and mortgage loans can also be reported to the bureaus.

The bureaus keep a record of all credit accounts in use. More importantly, they keep a record of the consumer’s payment history for each of those accounts. On-time payments, late payments, debt collections — all of these things are recorded within your credit report.

The information in your reports is then put through a scoring model (such as the popular FICO model) to produce a score. The FICO score goes from 300 on the low end to 850 on the high end. Higher is better.

So, your financial activity gets reported to the three credit-reporting bureaus, where it is compiled into a data file. This is your credit report. The data then gets put through a scoring system to produce your credit score. You have three scores in all — one for each of the credit bureaus (see diagram above).

Rent Payments on Credit Reports is Long Overdue

Rent payments should have been added to credit reports a long time ago. It’s long overdue, and I’m disappointed to see only one of the three credit bureaus taking steps in that direction. In the absence of such information, lenders will not be able to fully evaluate someone who could be a good candidate for a loan.

Fewer Americans are using credit cards today than in the past. And many people who do have credit lines have stopped using them. We have become a credit-wary nation, in the wake of our economic recession. Credit cards and mortgage loans are the two most common ways to establish a credit history (and the score that results from that history). So, in the past, consumers who didn’t have a credit card or mortgage had trouble establishing a credit history. When they did apply for a mortgage loan, they would often be rejected for having an insufficient credit history — a “thin file” in industry jargon.

The lender’s perspective was this: “We cannot determine how well you’ve repaid your debts in the past, so we cannot measure the risk of giving you a loan. Sorry. Try again next year.”

By incorporating rental data, the credit-reporting bureaus will allow responsible consumers to prove they are responsible. This is good for all parties involved.

At this time, only Experian is making this change. The other two credit-reporting bureaus, Equifax and TransUnion, do not include rent information in their credit reports. Nor have they signaled any intent to follow suit. Perhaps some prodding is in order.

TransUnion and Equifax Need to Catch Up

Now that Experian is paving the way for rent payments on credit reports, it’s time for TransUnion and Equifax to get on board. It’s in everyone’s best interest, including the credit bureaus themselves. It gives consumers another way to demonstrate their financial responsibility. It gives lenders more insight into the consumer’s risk level. And it gives the credit-reporting bureaus more data to report on more people (i.e., more stuff they can sell). This last item is important because these are, after all, corporations with profit-hungry shareholders.

So get on board, TransUnion and Equifax. Don’t let the train leave you at the station.