The crash of the housing market and the ensuing economic recession has wreaked havoc on credit scores of millions of people. Lots of hardworking people have suddenly found themselves out-of-work and evicted from foreclosed homes.
Now, many people are scrambling to rebuild their credit scores while living in a rental property.
What if you could work your way to a higher credit score to possibly buy a new home with your rent payments?
Credit Reports 101
Before any banks and lenders approve a lease or mortgage, they first take a look at your credit score.
The three most commonly used credit report bureaus are Experian, TransUnion and Equifax. Instead of using information from all three, lenders typically chose the middle of your three credit scores when approving (or denying) your loan application.
Your credit score improves as you make bill payments on time and declines when you are reported for delinquent or missing payments. Sounds simple enough, right?
How do rent payments factor into credit scores?
In the past, the big three credit bureaus did not include any rental payment information in credit scores, save for extremely negative items (i.e. if you’ve been evicted or went to court for delinquent rent payments). That all changed when Experian acquired the largest specialized rental reporting bureau, Rent Bureau.
As a result, Experian is including the Rent Bureau’s information in its credit reports. It’s still just one credit bureau, and one that could be ignored if that score is not between the scores reported at the other two bureaus. Hopefully, TransUnion and Equifax will follow suit in the near future.
What you can do as a renter
Unfortunately, property managers and landlords have not always in the past reported on-time payments to rental property credit agencies, making your up-to-date rental payment history a moot point on your credit score.
You can, however, improve your standing to lenders in addition to your credit score. In addition to a minimum credit score, lenders often require three open trade lines to qualify for a mortgage. In these cases, you can present your rental agreement in tandem with checking account statements that prove your on-time payments. This usually only works if you are seeking a mortgage approval.
There is one last option at your disposal. You could offer to make your rent payments through a property manager that reports to the Rent Bureau or similar company. Many landlord associations offer services like these.
At the end of the day, it is important to understand that credit scores, like any form of trust, can be destroyed faster than they can be built. Bad credit takes time and diligence to return to good credit levels. But don’t despair! If you make your payments on time and utilize some savvy tricks like the ones outlined above, you will find yourself on the path to a better credit future.
(Hedy Goldman has lots of knowledgeable information to share. She has been practicing real estate since 1996 and is a 2010 gold award winner at Windermere Real Estate SoCal. Hedy sells all over San Diego, but specializes in North County Coastal. She can be reached at 858-504-2334 or San Diego Realtor.)