How Paying Rent Can Improve Your Credit Score
Most people are probably aware that if you pay your bills on time, it can help improve your credit score. Establishing a good payment history, without any late payments, will boost your credit score because it shows that you are able to meet your financial obligations. Until recently, paying your rent on time every month had no impact on your credit score whatsoever.
That is because rent payments were not reported to any of the major credit reporting agencies. Credit reporting agencies look at things like mortgage payments, auto loan payments, and revolving credit accounts like credit cards when calculating credit scores. They never looked at rental payments, but that has changed.
What Has Changed Exactly?
In June 2010, Experian (one of the three major credit reporting agencies) acquired RentBureau, which is a credit bureau that collects rental payment histories from apartment owners and property managers. With that acquisition, Experian now includes rental payments when calculating credit scores.
On May 16, 2012, Experian announced that it would be collaborating with ClearNow, which is a company that will allow landlords and property managers to collect rents automatically by debiting bank accounts. Renters who choose to use that service can choose to allow ClearNow to report their payment history to Experian. What does all of this mean? It means that your rental payment history will be used to calculate your credit score, at least with one of the three major credit reporting agencies.
How These Changes Can Help People
With some of the changes that have happened recently the playing field has been leveled for a lot of people. In the past, paying your rent on time had no impact on your credit score but if you did not pay your rent and your account was handed over to a collection agency, that could have a very negative impact on your credit score.
The types of accounts that were traditionally reported to credit bureaus were things like bank credit cards, retail credit cards, home loans, auto loans, equity lines etc. Now things like rent payments, utility bills, insurance, cell phone payments and other nontraditional types of credit are being reported. This makes it possible for people that do not have home loans, auto loans, or credit cards to establish credit, earn a good credit score, and have the opportunity to get traditional types of credit at reasonable interest rates.
Approximately 1/3 of all of the people in the United States rent and many renters would like to become homeowners someday. If you are not able to establish credit, it will be nearly impossible to get a home loan. If you are able to get a home loan, the interest rates would be much higher than they would be for someone with an excellent credit score. Now, if you pay your rent on time every month that will help you establish credit and the dream of homeownership can become a reality.
The fact that paying your rent on time can help improve your credit score also allows people that have had financial difficulties in the past to rebuild their credit. If you have gone through a foreclosure or a bankruptcy, that will have a severely negative impact on your credit score. If you no longer own a home and all of your credit card accounts have been canceled, rebuilding your credit can be extremely difficult.
When you have a low credit score many things in life become more difficult. It’s not only difficult or impossible to get a home loan, an auto loan, or a new credit card, but having a low credit score can also make it difficult to find a place to live. A low credit score can make it difficult to start an account with utility companies for things like electricity, telephone service, garbage collection, and other basic necessities. A low credit score can even make it difficult to find a job because many employers will look at a candidate’s credit score before making a hiring decision. But now that paying your rent on time can help you improve your credit score, you can start the process of rebuilding your credit and recovering financially.