Credit

Does Paying Rent Build Credit?

If you are a renter finding yourself asking, “does paying rent build credit?” you are not alone. Many people working on establishing credit often try to use rent payments to build their credit. Whether or not paying rent will help you build credit will depend on a few different factors, such as active rent reporting and your payment habits. Below you will find answers, tools to help you pay your rent on time, along with strategies that can help you build credit. 

When Will Paying Rent Build Credit?

Rent payments fall under alternative credit data that won’t necessarily be part of your all credit scores unlike traditional credit data. Alternative credit data is not a part of a FICO score—the most commonly used type of credit score model. However, payments that fall under this data category are used in less popular credit scoring models; VantageScore® 3.0 and 4.0 and FICO® 9. Additionally lenders can look up these payments on credit reports and use them to determine your financial reliability. Other examples of alternative credit data include insurance premiums and utility bills. 

And so, having on-time payments with alternative credit data such as rent payments can help you build credit!

Opt-In for Rent Reporting to Make an Impact 

Paying rent will only build credit when reported to any of the three major credit bureaus—Transunion, Equifax, and Experian. 

The most straightforward way to ensure your rental payments are showing up on your credit report is to have your landlord or property manager report them. If they currently do not have this in place for you, simply ask them to start the process. Usually, landlords/property managers will already have a third party for reporting tenant payments and may just have to add your household.

If landlord reports are not an option, here are a few approaches you can take: 

Connect with a Rent Reporting Agency

A rent reporting agency is the most practical option to pursue, if your landlord does not want to report your rent payments. These agencies will notify credit bureaus of rent payments independently from your landlord, on your behalf. There may be a one-time enrollment fee from $50 to $100 and a monthly payment ranging from $5 to $10. There are many rent reporting agencies available. Before choosing one to work with, research topics like cost, which credit bureau or credit bureaus they report to, security, free credit report access, timeframes for reporting, and the cancellation process.

Use Credit to Make Rent Payments 

The option of a quick cash loan or credit card for rent may not be available for everyone, and depending on your payment habits may not be the smartest move. But if you have access to credit and can count on making payments right away, consider it to pay your rent. Using your credit wisely can mean building payment history, and sometimes even boosting your credit score. 

How Do Lenders See Your Rental Payments?

So, once you have your rent payments set up to be recorded, anyone who accesses your credit report can start to see them. To better understand how critical on-time payments are, knowing how your credit score works will be essential.

How Do Credit Bureaus Calculate Credit Scores?

Your credit score comprises several different factors, including your credit history. Credit history is a record of how you have managed things like loans, credit cards, and other debts. All this information is reported to the three major credit bureaus by lenders/creditors. These bureaus/agencies then take those reports and compute them into a score. 

To help you better understand how payment history affects your credit score, here is a breakdown of factors credit bureaus use to calculate credit scores:

  1. Payment history (35%)
  2. Credit Utilization (30%)
  3. Length of Credit History (15%)
  4. New Credit (10%)
  5. Credit Mix (10%)

As you can see, your payment history will have the most impact on your credit score/credit scores. And although technically, your rent payments will not directly impact your score, lenders can still separately access that information and use it to determine your creditworthiness. 

The Importance of Making On-time Rent Payments Once They Are Reported

Once your rental payment information shows up on all your credit reports, it will be imperative to ensure that you make payments on time. 

If you use credit to pay your rent, missing a payment will substantially negatively impact your FICO score—again, the most used credit score model! And even with a rent reporting agency, missing payments will show up on one or more credit reports and be a red flag for potential lenders. 

Having a good credit score and credit report is essential not only for future lenders/creditors. But you will also need good credit for jobs, future rentals, and large purchases like a home. Most employers, landlords, and mortgage lenders will check your credit scores and credit history to make a final approval decision. 

Best Practices for On-time Rent Payments to Build Credit

Don’t have a ton of experience with time-sensitive payments, or have had a hard time in the past with monthly payments? The good news is that there are strategies you can use to ensure that your rent and other bills are paid on time: 

Automate Rent Payments

Most of the time, rent is accepted through checks; however, this process can be time-consuming and easy to forget about compared to an automated system. Many property management companies have online portals set up for their tenants. If that isn’t an option, try requesting their information to set up bank payments into a business or personal account. Automating your rent payments can be one of the easiest ways to ensure that you are paying your rent on time. 

Create a Routine 

Another method that might work well if you are forgetful, is creating a monthly routine to pay your bills. For example, some people may pick a specific date each month, pay period, etc., to pay their bills. That way, after that particular date, you’ll know that you have paid all your bills, rather than having to manage multiple dates. 

Set Payment Reminders

Having physical and electronic reminders is another excellent way to remember to make your rent payment on time. You can set reminders on your phone and other electronic devices. Or keep it as simple as using post-it notes in common areas of your home. 

Paying Early Each Month

Getting your rent payment taken care of earlier in the month is another strategy that ensures that you are paying on time. 

Budgeting for Your Rent Payments

Budgeting is a tool that can help you manage your money. To create a budget, you will need to track your income and expenses and then create a spending plan. Drafting a yearly budget can work for some people, but a monthly budget works best for most. If you miss rent payments because of spending elsewhere, a budget can help you stay on track throughout the month to ensure that you have enough money to pay rent.

Other Ways You Can Build Credit?

Along with rent payments and other on-time bill payments, here are a few different ways you can build credit when you don’t have an established credit history: 

  • A secured credit card
  • Becoming an authorized user on another person’s account
  • Credit builder loans or products 
  • Using a cosigner for a loan

The Bottom Line With Rent Payments, Credit Bureaus, Credit Scores, and Credit History 

With timely payments, you can build a positive rental payment history. And although consumer reporting agencies won’t usually use rent payments to compute a FICO score, these payments can show up on your credit reports (as long as you set up a way to report them). With on-time rent payments, you can start building credit! Once you establish a positive credit history with credit bureaus, start taking advantage of financial products and offers, which can all help you build a solid credit portfolio.

References:

How to Report Your Rent to Credit Bureaus – NerdWallet