For the growing number of Americans–around 43 million households–that rent their homes, nonpayment of monthly fees can lead to disastrous consequences, including eviction. Paying late can create bad blood with landlords over time. While those people who do pay rent on time are more likely to be able to remain in place, those renters see few other benefits. Unlike owning a home, which enables people to build wealth and benefit from tax deductions, renting often feels akin to dropping one’s paycheck through a sieve. And there’s another crucial difference between owning and renting a home: On-time mortgage payments are factored into individual credit scores, and rent payments are not.
A robust credit score is necessary for accessing essentials like bank loans, and useful for receiving discounts on anything from insurance plans to phone contracts to, ironically, credit cards themselves–a Catch-22 that keeps many people, especially low-income people of color and immigrants, locked out of this sector of the financial system. Around 45 million people in the U.S. currently lack a credit score, yet many of those people have a solid track record of meeting significant financial obligations in the form of on-time rent payments, which often constitute up to 35% of someone’s income.
Last year, New York City comptroller Scott M. Stringer investigated how rent payment data could be included as a factor in people’s credit scores. Partnering with the credit bureau Experian, the comptroller’s team released a report showing that if rent payments were treated as a factor in credit scores, around 76% of renters in New York City would see their scores rise significantly, and around 28.7% of renters paying less than $2,000 per month would gain a credit score for the first time. Significantly, the average credit score for all renters paying less than $2,000 monthly would rise to around 700–a prime, or good, credit score that would help unlock access to loans and better credit card options.
Out of that report, the comptroller’s office is now rolling out a series of pilot programs to scale up the practice of rent-payment reporting for lower-income New Yorkers. In the Ocean Bay Apartments, an affordable housing development in the Rockaways where the mean credit score is 578, residents of 1,400 units will now be able to factor their rent payments into their scores, and tenants of 27 buildings in the South Bronx are also participating in the pilot. The comptroller’s office aims to scale up the program to reach residents in the five boroughs, potentially providing a model for other cities to follow.
Experian, according to RentBureau director Emily Christiansen, has been examining ways to scale up the weight of rent payments in credit scores since 2010. “We’ve been working to advance this idea for several years,” she tells Fast Company. As of 2015, both VantageScore and FICO–the two main credit scoring mechanisms in the U.S.–have stated that they will count rent payment data toward credit scores. The issue, Christiansen says, is that rent payment transactions are often kept between landlord and tenant, and never reach the credit bureaus like Equifax and Experian. Experian’s work has largely revolved around working with property-management companies and landlords to get them to provide rent payment data to credit bureaus.
Admittedly, this sounds like it could spell disaster for renters who do not or cannot pay on time. But the irony, Christiansen says, is that the penalty for renters in that position often makes its way into credit scores anyway. If someone stops paying their rent and it goes to collections, or their landlord evicts them, their credit score will drop. “If you weren’t paying your rent, ultimately, it will find its way to your credit file, but if you were paying it, it won’t,” Christiansen says. In essence, for renters, the credit system is very good at penalizing delinquency, but terrible at rewarding the type of financial consistency it’s supposed to reflect.
As a result, the comptroller’s office found that incorporating rent payment information to credit scores created net positive effects. The comptroller’s office and Experian worked together to analyze a sample of New Yorkers paying less than $2,000 per month who already report their rent payment data to Experian. The two agencies then analyzed the credit scores of those individuals with and without rent payments factored in, and found a noticeable lift after the inclusion of rent-payment data. Around 57% of renters saw their scores increase by up to 10 points; 19% saw increases of 11 points or more, and 18% saw no change. Just a total of 6% saw any decrease in score with the inclusion of rent payments. While the study is limited to New York City, the findings have implications for other cities and populations.
The effects are especially profound in areas of concentrated poverty, or where large percentages of people of color live. In the comptroller’s findings, zip codes where the average credit score was below 630 and where the effects of rent reporting would be most felt were 90% black and Hispanic, and the average income level hovered around $34,475.
As the comptroller’s office works to scale up pilot programs for residents, it also wants to get banks and credit unions involved. “By innovating new services that forward rent information to credit bureaus on behalf of renters, banks and credit unions could potentially gain new consumers interested in improving their credit,” Stringer writes in the report. “Banks, credit unions, and other financial institutions are already proficient in navigating the complex regulatory environment that surrounds credit reporting, making them well positioned to develop a product that could reach new consumers and markets.” It will also be crucial for banks, credit unions, and property managers–along with a network of more tenant-facing nonprofits–to educate renters about the benefits of reporting their payments.
National nonprofits like Credit Builders Alliance, which oversees a network of hundreds of smaller member nonprofits that aim to help people bolster their credit, are also working with affordable housing providers to encourage wider-scale rent payment reporting practices for tenants. Ultimately, Christiansen is hopeful that the type of work that the comptroller’s office is doing will push rent payment reporting into the mainstream–which will be crucial as the share of renters continues to reach new highs. “There’s a recognition that rent is one of the biggest payments that people make each month,” Christiansen says. “These people are essentially disadvantaged because they’re not receiving credit for making the payment.”