Historically, credit bureaus haven’t included rent payments in consumer credit reports, which means that renters who make timely payments every month aren’t getting any credit for it–literally. Their on-time payments aren’t translating to lower interest rates, better loan offers, or any of the other things that come with having a strong credit score.
While renters have a clear case to make for why their on-time payments should be factored into measures of their creditworthiness, landlords may not see any reason to get involved. After all, wouldn’t reporting tenants’ rent payments just be one more to-do each month?
In fact, thanks to various digital platforms, reporting timely payments doesn’t have to take any extra time at all. Even more important, though, it could actually help you attract higher-quality tenants, reduce turnover in your properties, and improve your cash flow.
Quick refresher: credit scores & rent
In case you’re a little rusty on your credit report and credit score basics, here’s a quick refresher.
The credit report includes information used to calculate the credit score, a number between 300 and 850 invented by the Fair Isaac Corporation (FICO) to assess an individual’s creditworthiness—that is, how likely they are to repay a loan. Those with high scores are the most likely to repay, so lenders typically offer them more money at lower rates. Those with lower scores typically have access to less money and must pay more to borrow it.
The theory is strong: it’s only rational for lenders to want a tool for evaluating their borrowers. But in practice, the system of credit reports and credit scores doesn’t always make sense, as in the case of rent.
Landlords commonly check applicants’ credit reports as part of the screening process, so we have agreed, as a society, that a person’s credit history is linked to their likelihood to pay rent on time. Still, it’s not yet common practice to report rent payments to credit bureaus, even though that would theoretically give borrowers and landlords more data points.
How big a deal is not reporting rent? In one pilot study, rent reporting led to a 23-point average increase in renters’ credit scores. That’s significant, given the impact of credit scores on the cost of loans. For those with poor credit, a 23-point bump (from, say, 635 to 658) could translate to a savings of more than $24,000 on a 30-year mortgage for $200,000. Even for those with strong credit, a 23-point bump could translate to more than $9,000 saved over the life of a mortgage.
The same is true for other types of credit: on a 36-month car loan, for example, a 23-point jump could translate to more than $4,000 in savings for those with weak credit.
In other words, reporting tenants’ rent payments over time could translate to major savings when they make purchases that require borrowing money.
Today, credit-savvy renters can pay a variety of services to report their rent payments to credit bureaus. But between activation fees, payment processing fees, and yearly fees, these services don’t always offer a clear benefit – especially when it’s not guaranteed that the information they report will go on the credit score lenders consider. (The latest version of the FICO scoring model, FICO 9, does capture positive rent payment data – but most lenders are still using a prior version.)
So that’s how reporting rent payments can help renters. Let’s dig into the benefits it offers landlords
Attract higher-quality tenants
A landlord who reports rent payments is hugely attractive to a specific kind of tenant: the one who pays rent on time. For this type of tenant, rent reporting is nothing but good news: instead of getting nothing for something they’ve been doing all along, they’ll suddenly get a benefit that could be worth tens of thousands of dollars when they decide to buy a home or car.
When you’re able to make that kind of offer, you’ll stand out from other landlords with similar properties—possibly a lot. According to one FICO spokesperson, only about one percent of credit files include information about rent payments, meaning they’re not widely reported (though that may change as the FICO 9 becomes more popular).
To ensure that your potential renters understand what your decision to report rent payments means, consider including information about the benefits of rent reporting in your application materials.
Unoccupied properties don’t yield income, so anything you can do to keep tenants in your units has the potential to improve your revenue. When your renters are incentivized with the benefits that rent reporting offers them, they’ll have one more reason to renew their lease.
In addition to minimizing the time your properties sit vacant, renewals mean less time screening new tenants, updating property listings, and generally handling the stressful paperwork required to manage a property.
And there’s another reason reporting rent can reduce turnover: by signaling that you care about your renters’ long-term financial health, you set the stage for a positive relationship with them. That’s significant, as anyone who has moved to escape a bad or inattentive landlord knows.
Improve Cash Flow
In addition to incentivizing the positive behavior of paying rent on time, reporting rent payments to credit bureaus can disincentivize paying rent late, which improves your cash flow.
Even better: while some platforms automate the reporting of on-time payments to a credit bureau, you have the choice of whether or not to report late payments (Avail, which I co-founded, is one example that does this). On many platforms available for rent reporting, you can also automate payment reminders to tenants before you actually report a payment as late, which makes the work of collecting rent even easier for you.
So reporting rent is effectively both carrot and stick: it rewards those who engage in the behavior that’s most beneficial to you and it penalizes those whose behavior hurts your business.
I mentioned earlier that, if you offer rent payment reporting, you may want to mention its benefits in your rental application (tip: link to this article!). After all, if your renters haven’t yet made a major purchase like a home or car, they may not be thinking much about their credit score.
By helping them understand its importance, and how renting from you can help them boost their score and save them money down the road, you’ll not only offer them a solid financial case for signing your lease but also demonstrate that you care about them as a person. Together, those are difficult arguments to ignore, and will give you a clear edge as top tenants seek out their next home.