Paying Rent on Time Should Help Your Credit Score, But Usually Doesn’t

If you rent (rather than own) your home, you may have felt a bit penalized when it comes time to apply for credit. Now, one of the world’s biggest suppliers of credit scoring information is showing how paying rent on time can really help improve credit-worthiness.

In most cases, paying your rent does not “show up” on your credit file. That’s because the relationship you have with a landlord is not an “official” credit relationship – such as you have with a credit union, bank or mortgage company when you take out a mortgage loan.

Therefore, homeowners can really improve their credit scores by paying their mortgages on time, while renters get no such credit boost — even if they pay their rent on time each month.

Experian said that it was the first of the “big three” credit reporting agencies to incorporate on-time rental payments to its database. The company has since conducted a study of how such reporting impacts the credit scores of renters.

The company sought to find out how rental tradelines impact credit file thickness, risk segment migration, credit scores and the ability to score previously unscoreable residents.

Experian found that, when properly noted in credit files, paying rent on time can really boost a person’s credit score. For instance, previously scoreable participants in the study saw an average VantageScore 3.0 score increase of 29 points.

Nineteen percent of study participants previously considered subprime migrated to at least one higher (less risky) risk segment. This allowed them to obtain more affordable credit and additional credit opportunities.

As you’re probably aware, borrowers with “thick” credit files usually have an easier time getting approved for credit than ones with “thin” files. This is because having a thicker file (and good payment history), shows that you can manage multiple credit accounts. This makes you appear more credit-worthy, and thus allows you better access to credit, on better terms.

By having their rental payment information included in their files, 23% of the “thin-file residents” in Experian’s study moved to the thick-file category.

Amazingly, 97% of the previously “no-hit” (credit unscoreable) residents fell into one of the two least risky risk segments with the addition of the rental information to their files.

This is a big deal, since having too little credit information on file can keep you from mortgages, auto loans and credit cards. Not only that, having no information on hand can cause you to be turned down for even the simplest of financial services, such as checking accounts.

What Experian is showing with this study is that responsible, pay-on-time renters are demonstrating that they are responsible in meeting their financial commitments. This should be a part of their record, and hopefully more credit agencies will start to include this data in the future.

In the meantime, renters should be sure to join a credit union before they apply for credit. CUs are much more friendly when it comes to considering the “whole person” when making credit-worthiness decisions.