The Hidden Problems Renters Face with Credit Scores

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Couple carrying moving boxes into new home
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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.

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? 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 histories.

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."

How Renters Can Make the Best of Poor Credit

Renters with poor credit scores should start rebuilding their score by paying bills on time.

You may want to apply for a secured credit card, which uses a deposit as collateral and your credit limit. Most secured credit cards report on-time payments to the credit bureaus and can be an excellent way to establish a credit profile.

You should keep records of your good payment history as additional proof that you are a good risk for landlords. Many credit unions also offer special credit-builder loans.

"There are a lot of responsible ways that you can build credit without getting yourself over your head with credit cards," says Butler. "There are ways to get ahead and build credit."

How to Capitalize on Your Great Credit as a Renter

Are you a renter with a great credit score even though rent payments aren't included in your credit score calculations? Ask for a discount because of it. If your landlord balks, ask to have your security deposit waived.

Shop around for a landlord who values your great credit score and rewards it. Know your credit score before you move in. Praise it while applying. Don't let it seem like a secret. Let your future landlord know that you understand your credit score and how good of a risk you are.

Did you know that rent payments aren't factored into your primary credit scores from the national credit bureaus? Is that fair? Do you think credit bureaus should consider rent payments when calculating credit scores?

Hank Coleman is the publisher of the popular personal finance blog Money Q&A, where he answers readers' tough money questions. Follow him on Twitter@MoneyQandA.

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awisec

Thanks to our Government/Banks fraudulant practices, our lives will never be normal again! By the way to FIRST TIME BUYERS..do not buy short sales! They rarely close escrow and last 6-12 months locking you into a contract and can't make other offers if you see a great opportunity. The same with Bank Owned Properties (REO), both these type of transactions are geared mostly to investors thatl 95% - 99% offer FULL CASH PAYOUTS and will always win the bidding wars. DON'T WASTE YOUR TIME WITH EITHER ONE. By the way, banks are now asking FULL FAIR MARKET VALUE APPRAISELS (which means a short sale really is not a short sale just advertised as one) fooling the consumer. For those standard home sellers, specially if your doing a short sale, make sure your agent is bringing you offers from outside brokerages (at least 1 a week) to prove they are doing a good job in getting the best offers. Unfortunately, this economy has forced some agents to become unethical and only bring offers to sellers that are only their clients and keep other agents away from the bargaining table. When an unethical agent acts this way, it puts the seller in jeopardy of foreclosure and when that happens, it does not affect the agent, they just move onto their next victim doing it all over again. Standard sellers and buyers have a responsibility to participate and research their options before making a contract. Again, make sure your agent is not related to any finance mtg personnel and is not affliated with any inhouse entities. Sellers and Buyers protect yourselves with all third parties (Realtor,Mortgage and Escrow etc..etc..) should be arms length from one another (makes it hard for them to hide mistakes). If their is a mistake, it will be caught when using different outside companies because knowone wants to take the blame and it will have to be dislcosed and resolved before closing. Make sure the agent signs an addendum saying they are not affiliated to anyone way of relative or close friend to any third party involved in the transaction.

April 16 2014 at 12:00 PM Report abuse rate up rate down Reply
unitedpaintings

The moral of this story, don't rent to Democrats.

April 16 2014 at 8:32 AM Report abuse +1 rate up rate down Reply