Building a good credit rating will be important for many renters because when you come to buy a home with a mortgage, your credit score will be considered by your mortgage lender.
A credit score represents your suitability to receive credit based on a range of data about your financial habits. It's mainly based on the information you provide on applications, as well as any previous credit agreements you've had and any debt problems you may have encountered in the form of county court judgements (CCJs) or bankruptcies.
If you have a low credit rating, you may not be granted a mortgage and therefore won't be able to take your first steps on the property ladder. Even if you're not planning on buying a property anytime soon, having a good credit score is important because it is also considered if you apply for a loan or credit card. Some prospective employers or landlords may also carry out credit checks before offering you a job or granting you a tenancy.
Do my rent payments count towards my credit score?
Unfortunately, in most cases, they don't. There has been plenty of criticism from financial commentators and renters themselves of the fact that despite paying rent on time for years - often at a rate equivalent to or higher than mortgage repayments - tenants can't build their credit rating with what is likely to be their biggest financial outlay each month.
In the past, there have been various campaigns to try and make it mandatory for rent payments to contribute toward tenants' credit scores. For example, the Creditworthiness Assessment Bill - launched by Big Issue founder Lord John Bird - gathered momentum in Parliament but ultimately stopped short of becoming law.
Since then, several alternative solutions have emerged. The best-known is The Rental Exchange, a free initiative which is open to all private and social tenants. The Rental Exchange holds information about your rental payments. This information is passed on to credit score provider Experian which then updates the tenant's credit score.
Renters can get their landlord to sign up, or they can sign up themselves through a provider like Canopy or Credit Ladder (these platforms will connect to your bank to see if you've made the right payments). Currently, the other main credit score providers, TotallyMoney, Equifax and TransUnion are yet to sign up to The Rental Exchange, but the partnership with Experian represents a positive step forward.
As the Private Rented Sector (PRS) continues to grow and more tenants rent for the long-term, it seems only a matter of time before tenants' payments are officially recognised in their credit ratings. For now, however, renters will have to use an initiative like The Rental Exchange if they want to build their rating through rent payments or take a more traditional approach to improve their credit score.
How can I build my credit score?
You can build the information kept in your credit file over time, and you will be assessed by the payments you make. You can build your score by paying bills on time and making sure you have enough funds to pay direct debits when they go through your bank account. You must remember that a lender will assess your eligibility for credit based on your recent financial behaviour. So, by showing that you can manage your money effectively over time, you build your profile as an attractive borrower.
Building a credit history is about having a credit history. This means you need to be taking steps to help lenders build up a picture of your financial situation and subsequently predict your future habits and ultimate suitability for credit. Therefore, you must be active in making regular payments like utility and phone bills. Meanwhile, having a credit card can also help, but only if you use it responsibly. It's also important to note that there is no uniform credit score or rating - all lenders and credit reference agencies have different criteria and provide varying scores. A credit score from a credit reference agency is designed to give you an idea of how lenders will view you.
This handy article explains some of the myths around credit scores and how the system works. As important as having a good credit score is, you shouldn't get too bogged down in worrying about it. Knowing how the system works can provide you with the peace of mind you need and help to set you on the right path to achieving the financial outcomes you desire.
Five quick tips to improve your credit score
- Register to vote - if you're not on the electoral roll, it could be very hard for you to get credit.
- Use eligibility calculators instead of applying for products - this can help you to minimise the footprint on your credit file if you're having difficulty applying for credit.
- Spread out your applications for products - too many applications in a short space of time could look frivolous, or even suspicious, to lenders.
- Avoid withdrawing cash on your credit card - lenders see it as evidence of poor financial management and habits.
- Cancel unused cards - if you have lots of unused credit, it can be beneficial to close some of the accounts. However, long-term accounts with good histories can be useful for applications.
How can I check my credit report?
You can check your credit report for free with TotallyMoney.
You’ll see up to six years of your credit history, find out why your credit score is what it is, and get tips on how to improve it. Plus, it’s a good opportunity to check all the info on your report is correct. If something’s not right, it’s easy to get it sorted so it doesn't impact your tenant application.
What could negatively affect my credit rating?
Most of the factors outlined above will affect your credit score and subsequent eligibility for credit. If you have a poor payment history, have missed payments and have court records such as CCJs, these could all have a negative impact on your score.
Lenders are also likely to look at your 'credit utilisation' - this is an assessment of how much you owe and how much of your available credit you are currently using. If you owe a lot of money and have used up most of your credit, this could be viewed negatively by lenders. When making applications, if your earnings combined with the amount you owe make the affordability of what you’re asking for unattainable, this could also have a negative impact.
As mentioned above, the length and volume of your credit history is also important. If you don't have any history, lenders will find it difficult to assess you and therefore your associated score might be low. In summary, there are plenty of ways you can improve your credit score while renting. If you are sensible with your money and understand what could affect your credit rating, there’s no reason why you won’t find applying for credit relatively straightforward.
*This article does not constitute financial advice, and you should contact a professional expert for further guidance.