Rent-to-own home payments unlikely to aid credit score
Dear Credit Score Report,
My husband and I are about to sign a rent-to-own contract on a new home. Both of our credit ratings sure could use a boost, and we were hoping that consistent payments on this contract would be reported to the credit bureaus. But how do I make sure the payments are reported? Any insight would be appreciated. -- Carol
I'm happy to hear you're committed to rebuilding your credit history, but since rent-to-own home payments typically don't help improve consumers' credit scores, you'll need to consider other strategies to achieve your goal.
As I'm sure you know, a rent-to-own home contract requires you to make monthly payments to the current owner, giving the renter the option to eventually purchase the house. A portion of those monthly payments will go toward the cost of the home. That's a pretty broad overview, and as with any home purchase, the details are very important. However, since your goal involves rebuilding your and your husband's credit histories, the most important detail is whether your landlord reports your payments to the three major U.S. credit bureaus (Experian, Equifax and TransUnion) that maintain your credit reports. That scenario isn't likely. Unfortunately for renters, most landlords don't share this information with the bureaus. And even if they do get included on your credit reports, rental payments may not benefit your credit score the way regular credit card or mortgage payments do. That's why even as you make consistent home payments, you also need to consider additional strategies for rebuilding your credit.
Without knowing the details of your contract or anything about the homeowner, the numbers suggest it's very unlikely your landlord will report your home payments to the bureaus. Right now, Experian is the only major bureau that collects and lists rental payment information (through its RentBureau Division) on consumer credit reports -- and just over 45 property managers presently report such information to Experian. "These are generally larger property managers, and we don't currently accept reporting from individual landlords," says Brannan Johnston, vice president and managing director of Experian RentBureau. Those participating property managers share both positive (on-time) and negative (late or missed) payment information with the bureau, but Experian only lists the positive data on your credit report. "We don't expect to add negative data until 2012," Johnston says.
Perhaps you've somehow found a property manager who reports to Experian. In that case, your positive rent-to-own payments will show up on the credit report from that bureau. Whether your borrowing behavior benefits your credit score, however, isn't guaranteed. FICO -- whose scoring model is used for most lending decisions in this country -- says it doesn't consider those payments. "Currently, rental information does not impact a consumer's FICO score, either positively or negatively," says Barry Paperno, consumer operations manager at myFICO.com, FICO's website for consumers. Still, you aren't entirely out of luck, since FICO's competitor VantageScore does consider rental information. If the payment data appears on your credit history, "whatever data is reported is what our payment model will pick up and score," says Mike Dunn, vice president of strategic planning and communications for VantageScore. Of course, a high VantageScore won't help you get a loan from a bank that only looks at FICO scores -- and many more banks currently use FICO in their decisions.
With all that being said, you aren't out of options for improving your credit history. Here are a few other strategies to consider:
- Make sure your landlord is reporting. If you haven't found one of the few that already reports, ask the homeowner to consider reporting your payment history. If it's an individual landlord that can't report to Experian, they can still report to a company that collects alternative data (bill or utility payments, for example) such as PRBC Credit Reporting Agency. Although that reporting won't help your traditional FICO score, it could help you secure future loans from any lenders that consider such alternative data.
- Clean up your credit reports. Tough times may have left your personal finances in poor shape, but you shouldn't have to pay for mistakes that aren't yours. That's why I'd recommend requesting a copy of the credit reports for you and your husband from each of the three bureaus (every consumer can get one free report from each bureau every 12 months) and examining them for any errors. Look for accounts that aren't yours or negative information that's too old to appear. Dispute any such errors you find. Getting them removed should help your credit scores.
- Payment cards for bad credit. I'm not sure if you already have a payment card, so consider applying for a credit card or secured card aimed at consumers with bad credit, rather than getting rejected for a card aimed at borrowers with more average credit. (Applying for credit can ding your score, however, so do so carefully.) As long as the bank reports to the bureaus, your responsible card use -- including on-time payments and low balances -- will help your credit scores improve over time.
One last thing: Buying a home and taking out a mortgage are for most people their biggest financial move, so once you complete the lease period and purchase the home, be careful not to miss any payments, as that's the fastest way to ruin both your credit scores. Just something to keep in mind as you both begin your journey on the path to better credit.
See related: 4 ways to re-establish credit after bankruptcy, Building a credit history without credit cards, Decade-old credit mistakes shouldn't appear on your report, Free credit reports: How to get the actual free one, How to dispute credit report errors
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