Credit is a fantastic tool that enables economic mobility and leverage. But for lower-income Americans, it can be difficult to boost their credit and maintain solid scores. Now, Experian is partnering with a pioneering nonprofit to create a way for all Americans to easily build credit — through rentals.
Renting has been an option for building credit for a while now. All major credit bureaus accept rent reports as credit history, but they usually rely on landlords to voluntarily report the information, which isn’t always the case.
Familiarity with rental reporting is low among both landlords and tenants. Most renters don’t know that they can build up credit while renting. That’s why the Credit Builders Alliance (CBA), a non-profit network designed to bridge the gap between those with little or no credit and the modern reporting system, is creating a Rent Reporting Technical Assistance Center (RRTAC) in partnership with Experian.
What is the RRTAC?
According to Dara Duguay, the CBA CEO, RRTAC will “function as a one-stop shop to assist landlords for low-income tenants. Coupled with comprehensive technical assistance from CBA, affordable housing providers will provide a roadmap and guidance for adding rental reporting to their operations.”
The overarching goal: to make it easier for tenants to complete or build their credit history. For many low-income families, renting is the only option. When landlords don’t report to credit bureaus, these tenants don’t get “credit” for on-time payments.
According to the CBA, renters typically have lower incomes than homeowners. The median annual income of a tenant in 2021 is about $43,000, and nearly 42% of tenants earn less than $35,000 per year. Tenants are also seven times more likely to be “invisible credit” compared to homeowners — that means most tenants don’t have enough credit history to generate a credit score.
In addition, the CBA states that black and Hispanic households are twice as likely to rent compared to white households. That’s clear evidence that RRTAC could play a critical role in healing America’s racial wealth gap.
Does Reporting Rental Loans Work?
There is evidence that it is.
In 2019, the U.S. Department of Housing and Urban Development conducted a survey of tenants and tracked their credit scores once rent payments were reported.
At the start, 49% of tenants had no credit score on any of the scoring models used. By the end of the trial, that number had dropped to 7%. Using a different scoring model, the percentage of tenants without credit decreased from 11% to 0%.
Other studies have found that for renters with a pre-determined credit score of at least 620, scores increased on average by nearly 30 to 45 points after continued reporting of rent payments. The biggest score increase was a whopping 215 points.
Credit improvements often appear relatively quickly as well. In a study by TransUnion, about 80% of subprime tenants experienced an increase in their credit score in just one month in rental reporting. About 41% saw their VantageScore increase by at least 10 points after a month.
Can credit reporting help landlords?
But the results aren’t just good for tenants. The program also helps landlords.
A survey by the Cleveland Housing Network found that on-time rent payments increased by 25% when landlords reported to credit bureaus. The reason? More incentive.
Yes, eviction is technically an important incentive as well. But so does high credit scores and wanting to avoid bad grades on your report card — which is positive reinforcement, versus the negative consequence of eviction. (Studies show positive reinforcement is more effective!) Plus, credit scores are tangible and accessible, with some apps making the experience of seeing a score rise and fall feels more like a video game than it does in real life.
These factors together ensure that more tenants pay on time.
How is the program executed?
California has been a major early adopter of RRTAC.
Last year, California Senate Bill 1157 was passed into the state legislature. The bill requires providers of affordable housing with 15 or more units to report the credit histories of their tenants. The law exempts assisted-living landlords with fewer than 15 units unless the landlord owns more than one assisted-living development and resides in a real estate investment trust or owns the property through a corporation.
California lawmakers are promoting rent reporting as a powerful economic mobility tool that can narrow the racial wealth gap.
As more states and landlords adopt rental reporting, it will be interesting to see how this discussion plays out. Will the industry be forced to introduce rent reporting into law? Or does everyone automatically browse to the same page?