Tenants currently receive no recognition on their credit report for regularly paying their rent on time. However, things are about to change thanks to some innovative tech-driven initiatives. Kate Saines finds out how this could put tenants on an equal footing with mortgage-holders and even help them buy their first home.
When we pay our credit card balance on time, it gets noted on our credit report. Ditto, when we make a loan repayment, pay a bill or – on the other side of the coin – default on a payment.
Yet, when a tenant pays their rent there is no such acknowledgement. It’s an oversight which seems bizarre when you consider the landlord in question has probably scrutinised the credit report before taking on their new tenant.
And it becomes even more absurd when you consider that with so many renters needing help to get on the housing ladder, having a history of timely rental payments would certainly not go amiss when applying for a mortgage.
But all this looks set to change, with the introduction of some new developments which aim to provide renters with the same recognition on their credit report as mortgage borrowers.
The Rental Exchange
Consumer credit reporting agency, Experian, is leading the way with a new scheme called The Rental Exchange which is due to be launched in the next couple of months.
It is been created in partnership with The Big Issue Invest, the social investment arm of the Big Issue magazine. Initially it was developed for social housing tenants and now it’s being opened up to the private rented market too.
When the scheme gets fully up and running it will be the first time rent payments will have appeared on UK credit reports.
“Homeowners with a mortgage have an advantage,” said Mark Goodfellow, Rental Exchange partner at Experian, “as their mortgage payment history can count towards their credit history and we believe rent payment history should be used in the same way.
“The data can be used by lenders to provide further insight into a tenant’s creditworthiness and affordability.”
The idea is that tenants’ rental payment history will appear on their credit history – and there’s no cost to the tenant or landlord.
Experian said it’s not just tenants who will benefit – landlords gain advantage from the knowledge their tenants have an additional incentive to pay their rent on time.
Indeed the Residential Landlords Association (RLA) has been undertaking work to include rent payment history within credit scores.
It called for proposals to be introduced after it emerged in a survey of almost 3,000 landlords that 61% would support the move.
David Smith, policy director at the RLA said it would provide landlords with a more accurate assessment of a prospective tenant’s credit and rent payment history.
The Rental Exchange is not the only scheme being developed to support renters. Credit reporting agency, Equifax, said in was in the process of loading a number of new data sets, including one on rental payment data.
However, Laura Hales, European head of product, explained it was a challenging area because rental data was sparse.
“A private landlord may only have one or two properties and the payments aren’t recorded or reported, and a number of data sources are unverified,” she said.
“It’s essential that we have robust processes in place to check that the data we incorporate into our reports and scores is reliable and accurate so it’s valuable to lenders and consumers.”
The Treasury’s Rent Recognition Challenge
Equifax has also supported £2 million challenge unveiled by HM Treasury to fund new solutions to gather and distribute rental data.
The Treasury Challenge was announced in the Chancellor of the Exchequer’s Autumn 2017 budget and launched at the Fintech Connect conference in December.
In a nutshell, the nation’s Fintech entrepreneurs were called upon to develop an app which would enable Britain’s 11 million renters to record and share their rent and payment data to improve their credit scores and boost their chances of getting a mortgage.
One of the winners was a company called META which picked up an award for its product, FirstHomeCoach. It works by capturing user’s rental payment data via Open Banking then verifying it with publicly available data sources.
This means, using the latest software, it is able to share the data with credit reference agencies, which generates a rent report which tenants can use to prove their creditworthiness.
Although only in the development stage, the prize money from the Treasury means META can now move on with this plans to roll out the product a lot sooner.
Ben Leonard, founder and CEO of META is pleased that rather than using people’s data to sell on or to inform advertising strategy, it is actually going to empower consumers and ‘help them to help themselves’.
He explained: “Our focus is identifying times in people’s lives when personal data is key to being able to make better decisions and then act on them. One of these key moments is when you decide to buy your first home.
“You need to use your data to understand how much you can afford, your credit situation, the type of mortgage and insurance you need etc.
“You also need to pass a huge amount of personal data over to your financial adviser, solicitor and others.
“Our hope with FirstHomeCoach is that we can turn home buying into an experience rather than a series of sold products and, using their data, help to put people at the centre of the process.”
META was already helping people check and improve their credit score when it applied for the Treasury’s Rent Recognition Challenge, however Ben admits it was very much at the beginning of its journey which made its win even more of an accolade.
However, they hoped the funding would accelerate its plans and provide a challenge and a way to validate its ideas to see if others also thought they were ‘onto something great’.
Concerns
Ben points out its solution did not require the landlord to confirm the rent had been paid so would not be adding any bureaucracy for them.
This is something for which The Rental Exchange has been criticised and was a major concern of the RLA.
David Smith of the RLA explained smaller landlords would be forced to go through another layer of bureaucracy in order to be included because their rents would first be paid to a ‘CreditLadder’ before being passed on to them.
“We are worried this will muddy the water,” he said, “about who chases rent arrears as well as distancing landlords from tenants.”
But Experian has defended this explaining CreditLadder was one of a number of partners it worked with to bring the Rental Exchange to tenants, landlords and agents.
Mark Goodfellow said: “Through open banking tenants will be able to self-report their rental payment information by allowing organisations to securely view their online bank account data to see payments made and have it reported to the Rental Exchange.”
It said people using CreditLadder to join the Rental Exchange can now do so and they can continue making payments directly to their landlord or letting agent.
Open Banking
One vital component which is enabling these projects to get off the ground is open banking, which was launched in January this year.
According to one of the other leading credit reporting agencies, Callcredit, this has been an important source of information in the development of rental data sharing and in enabling it to help ‘enrich’ consumers’ credit reports.
David Ross, chief technology officer at Callcredit information group, said: “This has enabled consumers to explicitly share current account data, including payment and repayment commitments, when and with whom they choose.”
Ross added: “Rental is one type in a wider set of non-discretionary financial commitments to potentially adopt such as Council Tax, utilities, insurance and telecoms.”
It would seem those saving for a mortgage could soon be improving their creditworthiness through many other areas of their financial life in the not too distant future.
How would this work for someone who pays their half to their partner, who then transfers money to landlord?