One of the easiest ways to repair your credit history is to pay your bills on time. Every bill, every time.
Most property managers don’t report rental payments to credit bureaus, partly because there is no national standard for how and when that information should be included, says Mike Doherty, head of the rental screening business for TransUnion, one of the three major credit reporting bureaus. Now some in the industry are trying to change that.
Experian has started including positive rental payments in its credit reports and TransUnion recently rolled out a tool that would make it easier for property managers to report payments to credit bureaus. Equifax says it doesn’t track rental payments and doesn’t have any programs in the works.
In the rare instances that rental payments are included, some people with subprime credit benefit from having more evidence that they are good about paying their bills on time, Doherty says. But by the same token, people who pay late because of financial struggles could end up with yet another scar on their credit reports.
Doherty recently spoke with The Washington Post about how including rental payments in credit reports could hurt or help a consumer’s chances of landing a new apartment or accessing new forms of credit — including mortgages. The conversation has been edited lightly for length and clarity.
Jonnelle Marte: How much more common is it for people to be renters today?
Mike Doherty: Surveys point to more of a willingness to rent, more of an appetite and less of this feeling or need to go to home ownership. Per a study that we released earlier in the year, when rental payments aren’t reported that actually hurts consumers.
How can rental payments affect a person’s credit score?
We compared first-time homebuyers, consumers who have never had a mortgage before, to renters. What you saw was the first-time mortgage holders on average had an increase in their credit score of 5 percent, which reflects that they are taking out a mortgage, making payments on that mortgage and getting credit for it.
Renters, on the other hand, we saw a flat or slight decrease. What’s going on there is, most renters aren’t getting credits for their rental payments. Most property managers and landlords are not reporting this right now.
Who benefits most from a change like this?
We did a separate set of analysis where we checked if we add rental payments to their credit report, what’s the impact? It was a particularly positive impact on the subprime population is what we found. Within one month, eight out of 10 were seeing an improvement in their credit score. About 40 percent of them saw a credit score impact by more than 10 points.
It’s what you might expect. What happens with more prime consumers is they already have credit, they’re already making payments, so the impact on their credit scores was less dramatic. The impact on the subprime group, where they start to get credit for these types of payments, the improvement that you see is more noticeable and more dramatic.
Credit scores typically pick up when are you making payments on all of your obligations, right? You’ll get hurt if you’re not making payments and you’ll get benefits if you are making payments. What happens is, when you add the rental payment to the credit reporting … you’ve now got an additional payment, and a significant one at that, that you’re getting credit for making on a monthly basis.
How common is it for rental information to be reported to credit bureaus now?
It’s not common. There are a small number out there who are doing it. Of the 40 million rental households out there, historically it’s been 1 million or less that are actively reporting those types of payments. So it’s a fairly small fraction of the market out there that’s reported historically.
What are the biggest obstacles and what needs to change for this to become more common?
Historically there has been a focus on loan and credit repayments that go on a credit report. I think there’s an acknowledgement emerging now that other forms of payment can help predict how someone will perform with credit — so things like rent and utility and phone payments. And rent being such an important payment for so many households, it’s certainly natural that that emerges as one of the early ones. But the other one is the infrastructure to come over. There hasn’t been good standardization over what’s needed to report, as well as it’s a very fragmented supplier base.
How would your approach make it easier for credit bureaus to do this?
If you think of the number of landlords and property managers who are out there reporting, there’s a lot of them and it hasn’t been a focus. No one’s been out there coming up with solutions to facilitate those payments and I think that’s what our ResidentCredit program is about. The intent is create ways that enable property managers to report in a standardized form.
Who needs to act to make it easier to report these payments?
We’re out there talking to property managers to get them to come on board. One of the processes we go through when we get credit is [to] go through a credentialing process. We want to make sure those who are reporting data to us are legitimate. So we go through a process to validate who is reporting. Therefore, we will go through that process with all of these property managers [who] want to do that. But certainly consumers can influence their property managers to participate.
What would this require of property managers and landlords?
What we’ve created is standard forms they can report the data to us in. There are different ways we’ve enabled them to do that. What property managers still need to do is create a process whereby each month, or with whatever frequency they desire, they can pull that payment data out of their accounting system and put it into our format and give it to us.
That’s the piece of work that’s needed of property managers. They need to be able to pull the appropriate data, put it in the right format, and give it to TransUnion or whatever bureau. We’re trying to make it as easy as possible for them. There’s broad support for this. It’s just a matter of getting the tools in place.
Could this also make it easier for people with good payment records to find new apartments?
I believe it would. One of the benefits for property managers is that they’ll have more visibility into past rental payment performance. Certainly those who paid on time historically should see the benefits of being recognized by the property manager.
What about for people who are struggling because of a temporary job loss or other financial hardship. Couldn’t this put them at a disadvantage?
Certainly in the long run, those who have historically bad payment performance without reason, property managers who look at that and use that as a criteria on whether or not to accept them, that may be an outcome.
It seems that some of these people would be helped just by having more payments accounted for on their credit reports. Can you talk about the difference between having little credit and having poor credit?
Certainly when we did analysis of adding rental payments to the credit report we saw that those who had very little credit history and therefore we couldn’t score them historically. The vast majority of those, when they did have their rental payments added, were now able to be scored.
The second part of that is those with poor credit history. Subprime consumers, when we added rental payment history to their credit reports, we saw eight out of 10 of them had an improvement in their credit score within one month. It’s something that we think would help people with thin credit history as well as the vast majority of people with poor credit history.
How could this make it easier for some consumers to access credit?
Certainly to the extent that property managers are looking at credit — and they are — that will help the vast majority of them get access to future rentals. The other one is improving credit scores will give that population access to credit and access to credit with better interest rates.
With a score, and with a better score, you’re going to get access to more credit whether it’s mortgages, auto loans, credit cards. And with improving scores you’re going to get access to more favorable credit. So on both the rental side, as well as on the credit side, I think it’s a positive outcome for those who are making on-time payments.
Is this a change that can create a path to homeownership?
The last piece of that is the mortgage piece. Since the financial crisis you’ve obviously had a lot of people displaced, had to give up their homes, move to renting. The extent that you’ve got something like this that’s helping to build their credit gives them more access to be able to get back into the mortgage circle and access to homeownership again.