If the rent payments of U.S. Department of Housing and Urban Development (HUD)-assisted families are reported to the credit reporting agencies, many of these households would cease being “credit invisible,” according to a report from HUD and the Policy and Economic Research Council (PERC).
“Fifty-three million people in the U.S. have sparse or no credit history which can lead to a credit Catch 22 – in order to qualify for credit, you must already have credit,” says Michael Turner, president of PERC and report co-author, in a statement. “This study shows a path to affordable mainstream credit for many HUD-assisted tenants and renters of all types by leveraging rental payment data.”
Landlords and employers typically require credit checks – and people who are “credit invisible,” or who have low credit scores, often have difficulty finding jobs and housing.
HUD’s research finds that HUD tenants who pay their rent on time could boost their credit scores to 620 or above by reporting their rent activity to the credit reporting agencies.
On the other hand, tenants who fail to pay their rent on time would need to build their credit.
The report includes several hypothetical scenarios, or risk models, showing what the impact might be from allowing this reporting.
Based on 2015 data, one analysis shows that by having HUD renters report their data, the percentage of “subprime” renters drops from 55% to 37%.
In another risk model, the rate of “un-score-able” tenants fell from 49% to 7%. In yet another the share of tenants with little or no credit history fell from 11% to 0%.
“Rent is the largest monthly recurring expense that many households pay and reporting it can be a powerful way to reduce credit invisibility,” says Seth Appleton, assistant secretary for policy development and research for HUD. “This unprecedented study will excite a new conversation about the need for focusing on improving the credit of low-income families, and how on-time rent payment is an important way to show credit-worthiness.”
The study analyzed credit scores (from Experian and TransUnion) of more than 9,000 HUD-assisted households in Cook County, Ill.; Louisville, Ky.; and Seattle using credit risk models from FICO and VantageScore.