The cost of being a renter has steadily risen throughout the last two years. Amid severe housing supply shortages, the highest inflation in decades and rapidly accelerating interest rates, rent growth has reached record highs. Through all of this, renters, at least up until recently, haven't received a boost to their credit scores for making on-time rent payments. Unlike mortgage payments, on-time rents are typically not reported to credit bureaus.
"Rent is the single largest expense for millions of households, but that payment often does not get reported to credit bureaus," says Corey Aber, vice president of Multifamily Mission, Policy & Strategy at Freddie Mac. "There is essentially no 'credit' upside for paying rent on time, but renters do have a downside. If they are late or miss a payment, it traditionally has been reported to a credit bureau if it goes to collections."
Freddie Mac saw an opportunity to address this widespread problem. In November 2021, the agency engaged credit reporting financial technology company Esusu to provide landlords an efficient way to report on-time payments and help renters build credit.
Bridging the Renter Gap
When Freddie Mac set out to address this industry problem, it looked for a specific set of criteria. Any prospective vendor would need to align with the organization's mission and provide credit reporting that was cost-effective for borrowers and free for renters. The program needed to also allow renters to view their credit score so they could understand the impact of their on-time rent payments, and automatically unenroll renters if they missed a payment.
"Esusu was the first firm we identified that aligned with our renter-centric values," says Aber. Renters benefit through improved credit scores, which not only helps to carve a pathway to homeownership but has implications throughout a renter's life, from obtaining a credit card to buying a car. But borrowers may benefit as well. The credit building initiative provides a new benefit to renters who consistently pay their rent on time, which could help reduce turnover and encourage timely payments.
Rapid Adoption Prompts Program Expansion
Since launching last November, the program has been a massive success. Nearly 75% of eligible households across approximately 950 rental properties enrolled in the program and it has proven to be effective in improving credit scores. Two-thirds of participating renters saw an increase in their credit score. "That is a meaningful improvement," says Aber.
To encourage adoption, Freddie Mac provided a financial incentive to cover the initial cost for borrowers, but organic adoption has gained momentum. "Borrowers are seeing the value, and that shows that credit building is really on the verge of becoming a market standard," explains Aber, adding that standardization is the ultimate goal.
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
Kelsi Maree Borland
