Many young people don’t realize their credit score has a big impact on their ability to rent a home or apartment. Most landlords pull credit reports before agreeing to sign a lease, and a less than desirable FICO score can severely limit your chances of getting into a decent apartment at all, let alone at a reasonable price.
90% of top lenders use FICO® Scores. Insurance companies, too, often charge higher insurance premiums to applicants with poor credit scores.
But do you have to let your negative credit score affect you in this way? Can you rebuild your credit history solely as a renter? Can paying your rent on time help you to rebuild your credit?
These are hidden problems people face with their renter’s credit score. The answers might surprise you.
“So many people pay rent, 100 million every month, yet there isn’t a comprehensive solution,” says Bill Butler, a founder of Rental Kharma. “The average renter in the United States is not building their credit by being a responsible renter.”
Collection agencies help landlords add dings to your credit report — non-payments or late payments. But most landlords don’t report their tenants’ good payment histories to credit bureaus, so the Fair Isaac Corp. (FICO) doesn’t include rent payments in its current calculations for its primary score.
“The current FICO score does not take into account rental payments as part of the scoring algorithm,” says Anthony A. Sprauve, senior consumer credit specialist for myFICO.com and Fair Isaac. “This is because these kinds of payments are not consistently reported to the credit bureaus to provide enough data to be statistically predictive of a person’s future likelihood of repaying a debt.”
Fair Isaac does include rent payments — when available — in an expansion score for consumers with a limited credit history.
Build Your Credit Score Through Rent Payments
Clearly, the deck is stacked against young renters to help build their credit histories. Rental Kharma is trying to change that by reporting on-time rental payments with participating landlords to Fair Isaac. And the company is urging the other credit bureaus to consider rent payments in the future, according to Butler.
“[Rental Kharma] works with apartment complexes and owners to offer our services to young renters,” says Butler. “A 20 year-old college student isn’t thinking about their credit. We can help to build awareness.”
Many parents also often guarantee rental leases for their children. Reporting rental payments from co-signed leases could build a credit profile for children and increase credit scores for their parents.
It’s not common for landlords to report good payment history to the credit bureaus because the technology hasn’t been available to capture the data from small rental operations. Rental Kharma, which charges $29 for consumers to report up to two years of past rent payments, wants to change that. It hopes its service will convince the national credit bureaus to start including rent payments in their primary credit score calculations.
“You are starting to see some of the big credit bureaus begin to consider looking at using rent payments in their calculations,” says Butler. “It’s an inevitable thing.”
Want to see other tips on how to make the most of your credit score? Be sure to check out the complete article on AOL Daily Finance.
Note: This article has been reprinted with permission.