The Truth About Rent Payments and Your Credit Score

Most renters pay their biggest monthly bill each month, on time, like clockwork, for many, many months. That rent check goes in the mail every month. Yet it does nothing to help their credit score. In fact, someone who buys a $4 coffee and puts it on a credit card, and pays that card off, impacts their credit score.

It’s no wonder millions of renters across the country are frustrated. They’re acting as creditworthy individuals, for one of the biggest life expenses to come, and credit bureaus overlook such payments. But now, as credit bureaus expand and adapt to modern audiences, does that mean that this is finally changing, and what does it mean if such payments start appearing on credit reports?

Why Rent Never Did Before

Credit scoring was built around loans and credit cards. If banks need to see how individuals manage borrowed money, they would have access to mortgages, car loans, personal loans, and credit card balances. But rent is not borrowed money, it’s a preferred service. Therefore, it never helped, the mentality was if you owned the asset your payments might be related to debt and thus help your credit situation.

However, this means that people could be invisibly creditworthy. Someone pays $2,000 a month for 10 years with no documentation to show for it but someone misses a $50 credit card payment, and it’s on a record for years. The system was not built to account for payments related to maintaining shelter unless someone owned a home.

For young renters, recent immigrants, and anyone trying to rebuild their lives, this process made everything harder. They couldn’t get car loans or decent credit cards because they had “too little credit history”, yet they are operating under significant creditworthiness as they had a payment but, alas, it never came to fruition.

How Rent Reporting Works

When someone’s rent payments are documented and accounted for by credit bureaus, it’s because the landlord or property management company inputs such information into one (or more) of three major credit bureaus. This is done through a facilitated service that connects the rental payment service with the credit bureaus, meaning it does not happen automatically, someone has to facilitate it.

Once rental reporting begins and continues through the facilitation process, those monthly payments become part of the cumulative report alongside other credit cards, loans, and vehicles paid off or still being paid off. On time payments go on record, and so do late payments, which is the aspect no one talks about enough at the onset.

Typically rent reporting goes through Equifax and TransUnion, the two biggest credit reporting agencies in Canada. Some landlords use rent reporting in Canada (and the US) to easy this process along; reported data comes in an easy-to-read format so credit bureaus can access them easily and write them into pre-existing files in their systems.

What It Does to Credit Scores

The impact varies depending on where individuals started beforehand. For those with thin files (few accounts or few historical merits) they receive the biggest boost as adding 12 or 24 months of data equals 30-60 points, from my research, from my clients who’ve taken this into account.

For those with existing installments already in place for other specific loans, rent reporting does not hurt but rarely significantly assists (especially if they don’t need it). Adding positive information to payment history where about 35% of each scoring model exists means positive trends are good to have.

However, once someone starts reporting – and they’ve been paying rent on time because they’ve experienced poor income yet has good credit history elsewhere, and immediately reports late due to lack of budgeting the report decreases as well. This is why some renters prefer not to report, they think that one month lost could ruin good credit they’ve established elsewhere.

Reported payments do not increase scores overnight; it takes several months for significant developments to report positively or negatively. Thus, someone seeking a mortgage within a month should get prepared for disappointment.

The Catch No One Discusses Up Front

Much of the conversation about reporting payment benefits focus on tenants but these benefits are very real – however there’s another side that doesn’t often get mentioned.

Once these payments start getting reported, they cut both ways. Timely payments work toward credits, but late payments, partial payments payments, or missed months get reported too. This means that tenants who’ve gotten away with paying late in casual situations – perhaps the landlord didn’t mind or it got worked out, now it’s permanent.

This creates stakes. Generally, landlords of informal situations have let tenants slide until the tenth without penalty, but now every late penalty gets sent to the bureau. The informal tracking all renters have worked in favor of gets formalized all of a sudden.

Some tenants fear privacy invasiveness as well – what’s been paid in numbers can be ascertained by whom each had a credit check run from them – this makes it easy for all except for those who feel it’s their business alone.

Who Benefits Most

The biggest success stories involve those who operate with little-to-no new or established credit and pay every month on time. Young professionals with first apartments or young graduates finding their way benefit most here, anyone who’s never lived on credit over the last few years but has been cash only now have credible options for banks.

Landlords benefit from different extremes; reporting rent payments means accountability and those who avoid timely payments are held accountable via their credit history; those looking to work on their credit seek out rentals where reporting is a possibility.

Those who don’t benefit either had substantive existing credits or none at all already making their positions relatively easy regardless; adding rent payments now might help them but they’re already demonstrating their credible worth in other ways.

What To Know Before Getting Rent Reported

Those looking to report must recognize that it’s irreversible (in the short term). Once those payments go onto any report and stay applied according to general guidelines over reporting timelines (7 years negative for corrections and indefinite positive), there’s no going back.

Those rentals should confirm what will be reported, some services only report on-time payments which give tenants an extra upside without risk while some rely on more stringent reporting which reports everything positive and negative equally. This is critical information anyone needs up front.

Then there’s automatic reporting, some landlords report by default for all their tenants while some do not; this is essential to understand before signing anything if this is important to a potential tenant.

Finally, there’s cost; some landlords absorb any fees associated with reporting while some pass them on to tenants. Paying $5-10 a month for reporting may be worth it for someone with thin credits, but for anyone who has established wealth credibility before this point it seems redundant and not worth the cost.

How To Make It Work for You

The best positive reinforcement for tenants who want positive results is simple, pay rent on time every time. Set up automatic transfers through a bank account or pay either immediately when received or immediately when due. Make this non-negotiable as it’s the best route to establishing credibility over time.

Credit reports should be monitored during this stage, this allows someone more insight into how scores may change before outsiders can come up with errors because credit bureaus do make mistakes, and it’s easier to correct before that point than months later after assuming everything was fine.

Finally, communicating with landlords is essential during this process, if there are discrepancies (payment doesn’t get reported until after it’s due) there may be confusion on when each payment is reported so it’s essential to know upfront instead of waiting until it’s too late, which could cost someone’s score.

Ultimately rent reporting captures an evolution in how the financial world sees the world around them, those who pay monthly aren’t operating under credibility upfront but now it means something beyond maintaining a roof over one’s head. For many who’ve been responsible-credit invisibly-this is no small feat-but it comes with responsibility and understanding both sides of having rents tracked as part of permanent financial records going forward.

 

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