In 2016, about 35 percent of the millennials were renting. It’s not so much because they wanted to. Usually, they didn’t have a choice. Many would like to own a house, but they couldn’t because they may not have enough credit history and, therefore, have low credit scores.
But can’t their rent contribute to improving their credit information? Find out here.
A Review of the Credit Score
A credit score is a number that tells you how much risk someone poses as a borrower. A higher credit score means less risk to the lender, so people with good scores can get favorable terms on loans and credit cards. Lenders use different numbers for this assessment, but the most common one is called the FICO score. The three components of a FICO score are:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
The Value of Payment History
Your payment history makes up 35 percent of the FICO score. Out of all three categories, this is the one that matters most to your score for two reasons.
First, if you pay everything on time, lenders will trust that you will continue to do so and give you a better interest rate on your loan. If payments are late or missed altogether, then it may seem like you don’t have much intention of paying back what you’re borrowing from them—even if that isn’t true.
Second, paying less than what is owed can be considered worse than missing a payment. It indicates that not only did they make a late payment, but they were also irresponsible when doing so. Additionally, if you change what is considered the “minimum payment” each month or if you pay more than your minimum amount, none of that matters unless it’s on time. Timeliness is a large factor in making this category so important.
If you can’t make your payments on time, then not paying at all will likely hurt your credit score more, but there may be a difference between being late and simply not paying.
It also doesn’t matter how much money you borrow as long as you make timely payments for every dollar borrowed. In other words, even though an auto loan has a higher interest rate than a credit card balance due to the nature of the loan itself (car loans are riskier than credit cards, after all), it will only matter if you’re paying on time.
It doesn’t matter how much or how little you owe, whether the loan is for $2,000 or $20,000, as long as the payments are being made on time.
If your payment history is part of your credit score and you can’t pay back what you borrowed (even if for a short period), that will hurt your score a lot more than having borrowed a large amount of money. To avoid seeing your FICO score change drastically due to this one category alone, ensure that every bill gets paid on time.
How Does Your Rent Impact Credit Score?
Because the credit score informs the lender of your trustworthiness and reliability in paying loans on time, it is a critical requirement when you apply for a mortgage. Even non-conventional home loans like VA, FHA, and USDA will still check the score, although the minimum score may be lower than when you try a conventional loan.
Many items can contribute to your credit score, but when it comes to renting, you’ll find yourself in a rather interesting position.
The credit score mainly depends on the data from the credit report. Many renters don’t know that landlords are not obliged to report these rental payments to credit bureaus. However, you can still see records of these if (1) the landlord becomes diligent enough to report or (2) if you missed repayments, and the landlord passes the responsibility of getting these payments to collection agencies.
But even if they may appear on the credit report, historically, they hardly impact the credit score. This could be because reporting these payments isn’t standard, and some renters pay using checks or money orders. Some versions of FICO can factor in rental payments, but not all lenders may be using them. The most popular doesn’t account for rent.
That may change come September 18. Fannie Mae shares that the underwriting system single-family lenders use may now begin to consider on-time rent payments even if they don’t appear on the report or don’t have any influence on the credit score. Instead, lenders will look into bank statement data to track rental payment history.
Fannie Mae doesn’t grant loans but instead backs them, but considering that this is supported by the government, it will still have a significant influence on the mortgage industry.
Building a credit score may be challenging for those renting, but good news seems on the way, especially for those committed to paying their rent on time.