Want to build credit? You have to borrow money, right? Maybe not anymore.
Last week, I wrote that not building credit soon enough ranks among 20-somethings’ biggest financial mistakes.
You think you’re smart to avoid debt only to get stuck a few years later unable to get a mortgage, pass a credit check for a new apartment or even get a cell phone contract.
Of course, it’s possible to do these things without credit, but having an excellent credit score certainly makes them easier. Thus, it pays to establish credit even if you don’t plan on borrowing much money.
Traditionally, the only way to establish credit was to borrow money in the form of a student loan or a credit card, and then show a consistent history of timely payments on the account. Credit cards make it possible to do this without paying interest, as long as you pay the balance off in full at the end of every month.
But getting a credit card without a credit history is a catch-22. If you don’t get a card as a student or as an authorized user on a parent’s account, you may only qualify for secured credit cards. These cards are a proven way to build credit, but they charge fees.
Even if you don’t have debt, there’s one big payment you make every single month – your rent. Being financially responsible, you probably pay that rent on time, everytime. So what if you could build credit by paying rent?
Two new companies want to make that happen.
Here’s how these “build credit paying rent” services work:
After creating an account with Rental Kharma you can verify your rent payments by submitting bank statements, check receipts, or having your landlord verify payments (your landlord doesn’t have to participate).
Right now, Rental Kharma reports these payments to the FICO Expansion Score. The Expansion Score is a product offered by Fair Isaac, the nation’s leading credit scoring company that provides information about people with limited credit histories. Rental Kharma hopes to include reporting to other major credit bureaus in the future. Rental Kharma is free to use for now.
At its core, WilliamPaid is a platform for making rent payments. If you use their service to pay your rent, WiliamPaid reports the payments to Experian. It’s free to pay by electronic checking debit or costs 2.95 percent of your rent to pay by credit or debit card. You can also pay by cash for a $10 fee at a network of drop off locations nationally. There is no charge for reporting your rent payments to Experian.
Again, your landlord doesn’t have to participate in order for rent payments to help you build credit.
Should you build credit by reporting rent payments?
If you pay your rent on-time, every time, these services offer a free way to get credit for that, literally. So as long as Rental Kharma and WilliamPaid offer free ways to do this, I don’t see the downside.
Of course, because you must opt-in to both services, if you pay your rent late you could damage your credit and it will be your own darn fault. Without enrolling in these services, that transgression would go unnoticed by everybody except your landlord.
How much will it help?
That remains to be seen. At the time of this article, both services only report to one credit bureau each. That means that your positive rental history with Experian, say, may not help you if you apply for credit with a lender that pulls a TransUnion credit score. With Rental Kharma currently reporting to the FICO Expansion Score, a lender may not see that history unless they opt to use the Expansion Score product.
That said, unless you sign up and then fail to make a rent payment on-time, these services probably can’t hurt and just might help you build good credit faster … without needing to borrow money!
How are you building your credit now?