Our Credit Scoring System is Biased Against Renters

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Posted by: John O'Connor

credit score and renting

Paying Rent on Time Should Improve Credit Score

In theory, a credit score is an accurate reflection of the collective payment history of a borrower. Missed a credit card bill three years ago? Mr. Mortgage Lender will see it. Credit scores take on an important role in underwriting because lenders rely on past performance as an indicator of future results.

Credit Scores Without Rental History Are Not Accurate

If you have missed credit card or car payments in the past, you are theoretically more likely to stumble again in the future. Of course, all of this is common sense, most people already know that their credit score plays a big role in securing a mortgage, car loan or an attractive interest rate. Having said that, most people don’t think about the inherent inequities that are contained within the current credit reporting system. Most consumers might not realize that the current credit reporting system operates as an obstacle which prevents many families from joining the middle class.

FICO Scores Are Too Important

If FICO scores are destined to continue playing such a large role in how, and under what terms, consumers can access credit, they must give a more accurate picture of a borrower’s credit worthiness. Millions of Americans suffer under the current system because the history of their rental payments is not reflected on their credit reports.

This presents a big problem for two reasons:

1. Especially after the housing crash, more Americans are renting. With housing as one of the largest payments a consumer makes on a monthly basis, failure to include consistent rental payments leaves a big piece out of the FICO puzzle. Leaving rental history out of the credit calculation compromises the legitimacy of the entire process. How can a credit report claim accuracy when it leaves out the single biggest payment many borrowers make?

2. For  consumer who can’t afford to buy, failure to include rental history presents an obstacle to owning a home, which is an obstacle to joining the middle class. Mortgage applicants, who are deprived of the benefit of their rental history, may have a tougher time qualifying for a loan or qualifying for an interest rate they can afford. As a result, many families will be forced to continue renting and won’t be permitted to take advantage of the tax advantages that owning property affords.

America Values Ownership

America is a society that values ownership. Part of the American dream has always been the tidy house with the white picket fence, the mortgage interest of which is tax deductible.  When you consider how important a borrower’s credit score is in securing a favorable mortgage rate, rental history can be the difference between a rate that a family can afford versus a rate that a family cannot afford. We are currently seeing record rental rates in Manhattan, partly because, the economic downturn has made it impossible for most people to qualify for a mortgage. As a result, landlords can charge higher and higher rent and borrowers have no way of fighting back. Leaving rental history off of credit reports gives landlords an unfair advantage against renters, especially in a bad economy.

Experian is Paving the Way

To date, Experian is the only reporting agency that is set up to incorporate rental history. While Experian is to be commended for attempting to portray accurate data, it remains to be seen how widely landlords will participate in the Rent Bureau program.

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Read also: I Filed Bankruptcy: How Can I Rebuild My Credit Score?