In the United States, housing is the most significant expense for consumers. However, many individuals face challenges when trying to save for a home due to high rents and home prices. Access to affordable credit is another major impediment for potential homebuyers. According to a 2022 fact sheet from the Office of the Comptroller of the Currency’s Project REACh, approximately 50 million Americans are considered “credit invisible.” This means they do not have a credit file or a credit score, making it difficult for them to qualify for a mortgage, credit card, or other forms of financing. This issue primarily affects individuals who have not interacted with the credit system, such as those new to the country, Black, Latino, and young people, particularly millennials, who are fueling the housing demand.
The Positive Impact of Rent Reporting
One way to address the challenge of limited credit history is through rent payments. While individuals with thin credit files may not have a substantial credit history, they may have a track record of making timely rent payments. In late 2022, Fannie Mae, a leading mortgage financing provider, introduced the Positive Rent Payment Reporting initiative. This program allows individuals renting in eligible properties to have their rent payments counted by credit rating agencies at no cost. By including rent payments in credit reports, consumers can potentially see an average increase of nearly 60 points in their credit score, as reported by TransUnion in 2021.
Fannie Mae’s pilot program has already helped over 35,000 individuals establish credit scores. Participants who already had a credit score noted an average score increase of up to 40 points after enrolling in the program. This initiative has empowered individuals like Joe Grande, a Florida resident, to boost their credit scores significantly. Grande saw an 80-point increase in his credit score within three months of signing up for rent reporting through Fannie Mae’s partner, Esusu. This improvement has put Grande on track to achieve his goal of purchasing a home and has instilled a sense of financial control and responsibility in him.
While rent reporting programs can expedite the process of building credit, it is essential to recognize that establishing a robust credit history takes time. Experts advise that it typically takes at least six months to create a credit profile and even longer to establish a reliable track record of repayment. A credit score, which ranges from 300 to 850, plays a crucial role in accessing financing options. Lenders generally perceive credit scores below 670 as higher risk, potentially limiting individuals’ access to favorable interest rates and loan terms.
While rent reporting programs can be beneficial, it is crucial for individuals to evaluate the costs and terms associated with these services. The Fannie Mae pilot initiative offers positive payment history to all three major credit bureaus at no cost. However, individuals using rent reporting services outside of this program should verify whether their payment information is reported to Equifax, Experian, and TransUnion. Reporting to all three bureaus can have a more significant impact on an individual’s credit profile. Therefore, consumers should exercise due diligence when selecting a rent reporting company to ensure that their credit-building efforts are maximized effectively.