For landlords who manage large property portfolios, the many degrees of separation between the landlord and a tenant for a multifamily unit can make it all too easy to be removed from the realities of renting. In theory, renting is an alternative to owning a home for those without the capital or credit to buy a property of their own. For the renters, though, having a long history of on-time rent payments does very little to impact their financial standing, because, unlike a mortgage payment, rent payments are generally omitted from credit score ratings. Obviously, that exposes a problem for renters, but it should be a concern for landlords as well.
Mortgage lenders using an applicant’s credit score to determine their ability to get a mortgage has only been standard practice since 1995. It’s funny to think that the link is so young when using a numerical score to represent an individuals’ creditworthiness is a concept dating back to the 1840s. Lewis Tappan, a silk-trading abolitionist who was burned one too many times by defaulting customers, came up with the first iteration of a national system for credit-checking. Josh Lauer, author of Credit Reporting and the Invention of Financial Identity in Nineteenth-Century America wrote that Tappan’s crude credit reporting system “introduced an entirely new way of identifying, classifying, and valuing individuals as economic subjects.” Tappan’s invention effectively “became a key infrastructural component of the modern credit economy and, in turn, produced its own category of social reality.”
That “social reality” that Lauer describes has shaped the commercial and market values of American society to this very day. As we know, credit is primarily what is used to evaluate a person’s ability to lease a property. But our current credit scoring system is not set up to predict a person’s ability to pay their rent on time.
The landlord’s gambit
Tappan’s basic concept of distilling the likelihood of default into one number persists to this day, but the factors that determine that specific number is where things become complicated. Although the exact formulas used to calculate modern credit scores are not public, multiple aspects of a person’s financial history are taken into account, the most prevalent being that person’s payment history. The problem is that rent payments don’t show up on a credit report.
A history of reliable rent payments is undeniably valuable to the landlord, even though landlords aren’t considered creditors, they can use credit scores for the same purpose that lenders do: estimating the likelihood of renters paying their rent on time. But that metric is paradoxical. Because landlords and property management organizations aren’t considered creditors, they don’t automatically disclose a tenant’s payment history to Experian, TransUnion, or Equifax. Frankly, a landlord using a financial measure that doesn’t even factor in a tenant’s rent payment history to determine whether or not they will be a trustworthy tenant doesn’t make any sense.
The fact that rent payments aren’t generally itemized in a credit score exposes another glaring problem. Young adults are the highest demographic of renters in the U.S. In 2019, 49 percent of renters in the U.S. were under thirty years old, according to Statista. It takes several years of credit history to render a decent FICO score, five years at minimum just to get a rating that’s the middle-of-the-pack. Though many financial experts advise everyone to open a credit card once they turn 18, 30 percent of Americans open their first credit line between the ages of 21 and 24. That’s almost a hundred million people that could run the risk of a skewed credit score because their credit line is too fresh to be considered reliable. If on-time rent payments aren’t taken into consideration, how many landlords are getting an incomplete and ultimately misleading picture of someone who could otherwise be a reliable tenant?
If rent reporting to credit bureaus was a more widespread practice, then “landlords can lower payment delinquencies by 36 percent, while tenants have reported bumps of more than 40 points in their credit score in a matter of months,” according to FrontLobby, an online platform that allows tenants to report their tenant payments to the Landlord Credit Bureau and Equifax.
From the renter’s perspective, the general omission of rent payment history to their credit score is undeniably frustrating because the biggest monthly spend for most renters is their rent payment. A report from the Joint Center for Housing Studies of Harvard University unveiled that 10.9 million renters, which is roughly one in four, spent more than 50 percent of their income on housing in 2018. While renting doesn’t yield equity like mortgage payments do, the fact that an expense that can take a huge bite out of a renter’s budget doesn’t provide any financial benefit to the renter is a source of ire.
There’s an app for that
One startup, in particular, is putting a creative spin on using rent payments to impact a tenant’s credit score. “When we started Piñata,” began Chief Executive Officer Lily Liu, “I wanted to know how many of us were renters, so when I posed that question to my team, every hand at the table shot up. That’s how close to home bridging the credit discrimination gap is for us.” Piñata, a New Jersey-based startup, seeks to reward renters who make on-time payments by allowing them to build credit with their rent payments, as well as a few other unique perks. Users of Piñata’s mobile app can earn in-app currency for paying their rent on time that users can spend on hundreds of thousands of real-life brands, ranging from Costco, Amazon, ClassPass, and Starbucks. According to Liu, these same incentives exist for landlords that participate as well.
But is a free Starbucks latte or a discount on a Costco purchase enough to sway landlords to report rents to credit agencies? Well not necessarily, according to Liu, but Piñata’s perks are just icing on the cake. “When you factor in the big picture, the more landlords we can get to report their tenant’s payment history, the better. While Piñata’s core mission is to bridge the credit discrimination gap for renters, you can’t deny that landlords and property management companies would benefit from this kind of financial inclusion when they’re deciding who to rent to.”
If FICO scores are to be taken as gospel for whether or not a person can reliably pay their mortgage, then it’s absolutely mind-boggling to think that a person’s rent payment history wasn’t considered in the design process. The classic tale of homeownership involves renting a place to live so that the renter can save money for a down payment on a house in the near future. However outdated that sentiment may be, it’s a pitch we’ve all heard before, even in the mid-90s when Freddie Mac began having their lenders use FICO scoring for all new mortgage applications.
Of course, Piñata is not the only platform that’s trying to galvanize rent reporting, but it is among the many that are prompting landlords to realize whether or not they decide to do so with a mobile app, offering to report a tenant’s rent payments to the credit bureau is its own incentive to attract tenants. Rent reporting as a perk for your tenants may help you attract individuals who are more likely to have their financial ducks in a row and pay their rent on time. Credit scores were initially designed to vet the creditworthiness of an individual. But perhaps now is a time to revamp the credit reporting industry by embracing rent payment history as a building block to a credit score. It could help landlords make better screening decisions and would help a lot of good tenants prove their trustworthiness, even without established credit.