Why Rent Reporting Is a Pathway to Good Credit
EDITOR’S NOTE: This is the first in a series of blog posts published by Prosperity Now’s Affordable Housing team about rent reporting: the monthly reporting of tenant rent payments to at least one of the major consumer credit bureaus for inclusion on consumer credit reports. This gives individuals with poor or no credit an opportunity to build up their credit without taking on additional debt, applying for a new product or making another monthly payment. This post was provided by Credit Builders Alliance, which provide nonprofits with both the ability and critical technical assistance to report loan data to the Credit Reporting Agencies so that individuals and families can build credit histories.
The series will feature stories from organizations across the country discussing the opportunities and challenges of rent reporting programs. These stories illustrate the processes of effectively implementing rent reporting, such as client selection, integration of financial capability services to support rent reporting and how to make sure your organization is ready to launch a program.
During a recent visit to a new affordable housing building in Utah, I was alarmed that the tenant screening process made living there less affordable. Applicants are rejected if they either have no credit history (often called “credit invisible”) or credit history that is too thin to be scored. If an applicant has a low credit score but is accepted, an extra $300 is added to their security deposit. According to the property managers, 78 percent of their tenants were charged an increased security deposit due to their credit score.
While housing providers seek to mitigate their risk, this policy has perverse consequences on tenants. It acts as a double penalty to low-income renters who are already at a disadvantage in the housing market.
Just over one in three U.S. households live in rental housing. That percentage is even higher for families of color and those living at the lower end of the income spectrum: Black and Hispanic households are twice as likely as White households to rent their homes. Renters also account for nearly 60 percent of all U.S. households with income under $25,000 per year.
Recent research from LexisNexis Risk Solutions shows that renters are seven times more likely to be credit invisible compared to homeowners. This makes sense because a mortgage is an open active item that filters onto the credit reports of most homeowners. Yet, because renters often have limited opportunities to establish or build credit, renters of color and those with lower incomes can be pushed further into a cycle of poverty where getting ahead financially is wrought with barriers, such as that extra security deposit fee.
Fortunately, many have recognized this problem and are developing ways to increase accessibility to credit, particularly through alternative data. At Credit Builders Alliance (CBA), we wholeheartedly believe in the power of rent reporting to open doors for renters with no or poor credit. Rent reporting, the regular reporting of tenant rent payments to at least one of the major consumer credit bureaus for inclusion on consumer credit reports, has become a proven way to help renters build credit histories.
For example, from 2012 to 2015, CBA conducted a Rent Reporting pilot, which catalyzed rent reporting to build credit for eight affordable and public housing providers in Texas, New Hampshire, Maryland, Illinois, Ohio, Massachusetts, California and Oregon. Of the 987 low-income renters whose rents were reported through the pilot, 79 percent saw their VantageScore increase by an average of 23 points, and 15 percent moved into a lower credit score risk tier. Every renter who started off the pilot as credit invisible became scorable during the program. In addition, since many renters aspire to become homeowners someday, the Urban Institute simulated the predictiveness of rental payment on mortgage payments and found that it is likely a strong indicator of mortgage performance.
Fueled by these findings, CBA has gone on to support dozens more housing providers across the country to implement rent reporting. Almost a year ago, we teamed up with Prosperity Now to work with three housing authorities in Oregon—Home Forward, Housing Authority of Clackamas County and Northwest Oregon Housing Authority—to help them set up rent reporting for credit-building programs. These housing authorities don’t just offer rent reporting to their tenants, they also foster partnerships with financial capability providers so that residents have access to supportive services such as credit coaching and credit workshops. This will allow tenants to truly leverage the opportunity of rent reporting as a stepping stone to achieve their goals.
We hope that through this pilot and other rent reporting efforts, the days in which residents and other renters have to pay the price of low or no credit are numbered. Rather than spend their time saving for large security deposits, they will go on to save for their own home, their children and their future, all the while getting credit for paying their rent.
Stay tuned for an upcoming post about our fintech partnership, through which we’ve created a new platform to reduce barriers for housing providers that want to offer rent reporting!
For more information about Credit Builders Alliance and the Rent Reporting pilot visit our website.
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