Does Paying Rent Build Your Credit?

Many people looking to build or rebuild credit are willing to consider just about anything that will positively impact their credit scores. Since the majority of people without a mortgage will make a rental payment each month, many renters wonder how they can get their monthly rent payments to show up on their credit reports. There are a few options. But unless your landlord automatically reports your payments to a credit bureau, you will likely need to spend a little bit extra each month to have your rent payments positively impact your credit scores.

Below, we highlight a few different ways to make this happen. However, like all personal finance matters, your best option will entirely depend on your unique financial situation.

First, you need to know the difference between your credit score and credit history. Your credit history is a record of all of your debt and repayments. Your credit score is a score generated by a credit bureau that is meant to show how responsible an individual is at repaying their debts in a timely fashion. You likely have a different credit score with each of the major credit bureaus. Realistically the scores will be similar, but it is unlikely they will be identical since each bureau compiles its own credit report on your debt and payment history.

Common items on your credit reports will include auto loans, personal loans, and a student loan if you have one. Incidentally, monthly rental payments are not typically included in your credit report. They can be, of course, but their inclusion is not always a given the way a mortgage or auto loan would be.

Lenders regularly provide updates on the status of your accounts to one or more of the three major credit bureaus. The credit-reporting bureaus compile reports of all your various credit accounts, whether it’s an auto loan or a credit card with a major financial institution. The credit bureaus then provide credit scores meant to inform lenders about the potential risk of lending to you. A good credit score generally means you have a history of responsible credit behavior. A low credit score can seriously impede your ability to qualify for new loans.

Although the three credit bureaus may use slightly different credit information, they all follow the same general guidelines. So, if you are trying to improve your credit health, choosing to report your rent payments might be the right place to start.

If you are regularly making on-time payments, you may be wondering how your rental payment history can be used to improve your credit scores. Paying rent won’t always build credit because your rental payments may not be reported to the credit bureaus. Unfortunately, consistent failure to make rent payments on time will usually hurt your credit scores. If your landlord is forced to send you to collections, the credit bureaus will be informed of your delinquent account by the collections agency.

If you are lucky, your landlord may already be reporting your rental payments. For example, California just passed Senate Bill 1157, which now requires many landlords, especially those with low-income tenants and property management companies, to provide their tenants’ rental history to one of the consumer reporting agencies. If your landlord doesn’t already offer a way to report rent payments to the credit bureaus, there are a couple of ways you can try to report them on your own. However, the most economical solutions will likely require some cooperation from your landlord or the property manager.

Using a credit card to make your rent payments will cause the transaction to be added to your credit report, but only because all spending activity on a credit card is reflected in your credit history. Paying rent with a credit card can be beneficial if it doesn’t come with any egregious added costs. But you will probably need to use a third-party service since most landlords do not accept credit card payments directly. Many of these services will charge a processing fee between 2% and 3%, which would essentially be an increase to your rent. Maybe 2% or 3% doesn’t sound excessive. But with the average rent payment being around $1,400 each month, paying an extra 3% service fee adds up to over $500 each year.

Being financially responsible with your credit card balances is important. Letting a few months of rent pile up on a single credit card can easily place you near your spending limit. Although this solution is usually less than ideal, it will probably require less cooperation from your landlord.

Rent-reporting services are organizations that will report rental payments to the credit bureaus. They will report on-time rent payments, but they will also report if you fall behind in your monthly payments. Some rent-reporting services will need your landlord to verify that you are making your rental payments on time. Whether you need your landlord’s cooperation will depend on which rent-reporting service you use.

Rent reporting isn’t normally a free service, and the exact cost will vary from service to service. Many services will have a one-time enrollment fee in addition to a monthly fee. However, if the rental data is offered, all three credit bureaus will add your rental payment information to your credit file.

If you have a positive rental payment history, a rent-reporting service can be one way to improve your credit score. Many services can even add up to two years of rental payment history to your credit report.

Whether you are looking for ways to improve your credit score or you want to graduate from monthly rent payments to a monthly mortgage payment, our comparison tools can help you find the right financial service. It may help to enlist a credit-monitoring service to track your credit reports.