If you save your money, avoid credit-card and other debt and pay all your bills on time, you may assume you have a stellar credit score. You might be wrong.
Consumers - including renters who are thinking of making the move to homeownership - who have a limited credit history or are new to this country may not have any credit score or may have a low score because of the lack of proof they are likely to repay a loan.
Americans have three credit scores, each based on the credit history obtained by one of the three credit-reporting bureaus: Experian, Equifax and TransUnion. Credit scores are also known as FICO scores for the Fair Isaac and Co. software used to calculate the scores.
According to MYFICO.com, “For your three FICO scores to be calculated, each of your three credit reports must contain at least one account that has been open for at least six months. In addition, each report must contain at least one account that has been updated in the past six months. This ensures that there is enough information - and enough recent information - in your report on which to base a FICO score on each report.”
Accounts that generate information for a credit report include student loans, credit cards, auto loans and personal loans, but not utility bills or cellphone bills. Renters may assume their on-time rent payments count toward building good credit, but those payments are not usually counted for a credit score.
“Rental data is an area of growing interest, as it can potentially add payment information to the credit histories of millions of consumers who have little or no credit history,” said Anthony Sprauve, director of public relations for FICO. “The compilation of this data is still in its early stages, compared to standard credit-bureau data. As a result, it is not reported consistently enough to the credit bureaus to be a component of many people’s FICO scores.”
Rental payments are not part of the credit reports generated by TransUnion or Equifax, but as of December 2010, Experian includes positive rental payment data as part of consumer credit files if it is reported by a property-management company.
“Rent payments are not typically reported to a credit bureau unless the rent is past due and has gone to collections,” said Brent Mendelson, a senior loan officer with Monarch Mortgage in Rockville. “We do a verbal verification of rent payments just like a verification of employment, but we generally do rent verification mostly on someone with a low credit score so we can find out if they have been keeping up to date with their rent.”
Gregg Busch, vice president of First Savings Mortgage in McLean, said using rental payments in a credit score would be helpful to people who need nontraditional credit approvals, such as young people or new U.S. residents.
“Including rental payments would help young people establish credit, and it could offset some negative credit information that gets reported, such as not paying a doctor’s bill or taxes or anything that can go to collections,” Mr. Busch said. “Unfortunately, as of now, rent information is not being used for credit approvals.”
Mr. Mendelson said Fannie Mae and Freddie Mac have not announced any change in their automated underwriting system that would include rents, so lenders do not use rental payments as part of their qualification process for a mortgage approval.
A new service offered by RentReporters.com gives renters the option of paying $89.95 for one year, with an annual renewal fee of $49.95, to have their rent payments sent to Payment Reporting Builds Credit (PRBC), an alternative credit-reporting agency.
PRBC then generates a four-in-one credit report that includes its data along with data from Experian, TransUnion and Equifax. Mr. Mendelson said he was not aware of any lenders using credit reports from PRBC for loan approvals.
Mr. Busch said consumers may not realize that the report they see when they request their own credit report is not the same as the report viewed by lenders.
“There’s a discrepancy between consumer credit reports and lender credit reports, which often means that consumers see a higher credit score than lenders do,” Mr. Busch said. “I still think consumers should request their free annual credit report or even pay a little to see their credit scores in order to review their history and to see which way the scores are trending. But they should also see a lender who can review the lender version of their credit history.”
Mr. Busch said VA loans require rent verification, while loans guaranteed by the FHA, Fannie Mae or Freddie Mac do not.
“Lenders are allowed to use nontraditional sources of credit for FHA loans if the borrowers don’t have enough of a credit history,” Mr. Busch said. “We use car-insurance payments, utility bills and rent payments, so if you lack credit history, you should keep a good collection of all your bills and canceled checks to prove that you are a good credit risk. We can call your landlord or even use a copy of your lease and 12 months of returned rent checks.”
Borrowers cannot use nontraditional sources of credit for conventional financing, Mr. Busch said.
For borrowers with a limited credit history, Mr. Busch recommended concentrating on building a history with traditional methods.
“First, you should get a credit card, even if you have to get a secured credit card,” he said. “If you need a secured card, you just deposit money in an escrow account with the bank and then charge things on the credit card. Always pay the balance in full each month, and the payments will start to show up within six months.
“It usually takes about a year, but eventually the bank will usually approve an unsecured credit card and you can get your deposit back.”
Mr. Busch suggested getting a maximum of two credit cards, making sure to use them and to pay the balance in full and on time every month.
“If you don’t have a credit score, you should carefully build a credit history with a credit card,” Mr. Mendelson said. “But it’s never one thing that sinks a loan. If you want to buy a house, you also need to make sure that you have a debt-to-income ratio below 45 percent, that you have cash reserves and money for a down payment and that you can afford what you are buying.”
Mr. Mendelson recommended that anyone interested in buying a home, even if intending to wait a year or more, should consult with a mortgage professional.
“If you pull your own credit report, you may have a false sense of security because mortgage lenders have different standards,” Mr. Mendelson said. “A mortgage professional can prequalify you based on your income and credit and give you advice about what you can afford and what you need to do to improve your credit.”