For many consumers, a confusing part of trying to get a loan is the way that credit begets credit. Banks want to lend to people who’ve proven to be a good risk. Without a track record, getting a loan can be hard or expensive. A new report from the credit bureau Experian shows that many borrowers could benefit if lenders took rental payments into account.
As lenders bounce back from the Great Recession, they’ve been looking at a broader range of non-traditional data to identify more potential-borrowers who could be a good risk. The idea is some people who don’t have regular credit histories but pay their rent, utilities, and other recurring expenses on-time could a good credit risk. In 2010, Experian bought RentBureau, which tracks apartment rents from large property managers. Using that new data, Experian published an analysis [PDF] that focuses on almost 20,000 people in government-subsidized housing who pay their monthly rent on-time. (Renters who missed payments were already reported to credit bureaus through collections agencies.)
Before adding in rental history, 11 percent of the sample had no credit file at all, which makes it extremely hard to get loans. Once the rental history was added in, 59 percent of that group had prime credit scores, and another 38 percent had “nonprime” scores. Just 3 percent were considered “subprime.”
For the rest of the sample, those who already had a credit score, about two-thirds were considered subprime borrowers to start. When taking rental history into account, 21 percent didn’t see their scores change, and 5 percent saw their scores decrease. The largest group of people—about 74 percent—saw their scores increase. Overall, the credit scores went up an average of 29 points. (Like a FICO score, Experian’s VantageScore is on a scale from 300 to 850.) The report estimates that the credit card interest rates for a borrower who jumped from the “subprime” to “nonprime” would be 4.2 percentage points lower.
While adding new types of data like rent to credit scores means consumers must be vigilant in ensuring a growing number of companies are reporting the data accurately, the Experian’s study makes a compelling case that adding rental history could help people who most need a leg-up.