Credit Score May Include Rent, Utility Payments

The estimated 50 million people who are “credit invisible” to creditors and lenders because they don’t have enough credit to build a credit score may be getting some help from Congress.

A bill called the Credit Access and Inclusion Act was referred to committee on Oct. 30, and if it’s ever approved by Congress, it would allow utility and telecom companies, and rental companies, to report their customers’ on-time payments to credit reporting agencies to establish a more complete report.

Currently, only late rent and such bill payments are reported, if they’re reported at all.

For renters and others who pay their bills on time but don’t have a good credit score, the bill’s authors argue that such on-time payments should be used to help give them a credit history.For renters and others who pay their bills on time but don’t have a good credit score, or don’t have any credit, the bill’s authors argue that such on-time payments should be used to help give them a credit history. Without it, they must pay higher interest on loans and credit cards, and often go to pawn shops or payday lenders to get cash to pay their bills, they say.

For young people trying to establish good credit, paying rent on time may be the only way they have of showing they’re dependable.

Howcr edit scores are determined

Most of the information in a credit report is supplied by lenders. Since a phone bill, for example, isn’t a loan, it isn’t reported by a lender as a way to improve a credit score when it’s paid on time.

The bill wouldn’t require phone, utilities and other companies to report timely payments to credit agencies. It just states that such reporting is allowed.

Such bills currently aren’t considered debt — a term used in calculating 35% of a credit score, says Harrine Freeman, a financial literacy advocate. In addition, 30% of a credit score is calculated based on payment history, including credit cards, department store accounts, installment loans, finance company accounts, and mortgage loans.

The downside

Giving credit bureaus more information about consumers won’t necessarily help them improve their credit, say opponents of the bill.

“This is a train wreck waiting to happen. While the intent is admirable, there will be more harm than benefit for all consumers,” says Bennie Waller, a professor of finance and real estate.Including the monthly bills of rent, cable, phone and utilities in the credit scores of financially struggling families would only hurt them, Waller says. Many people are renters because they have poor credit history, and such reporting would only hurt their credit more and make it “virtually impossible to qualify for a conventional home loan,” he says.

If such accounts aren’t paid on time, then reporting them in credit reports will lower credit scores. If a bill isn’t paid on time, service is terminated and the consumer isn’t taken to court for the unpaid bills. If the bill is passed, companies would be able to take consumers to court over unpaid bills, Freeman says.

As anyone who has asked a bank for a loan knows, it can be a Catch-22 to get one when you don’t have a good credit history with a credit card or mortgage loan already in your hands.

It’s a lot easier to lower a credit score than it is to raise it. Missing a few utility payments during a few rough months could be a lot more difficult to erase than improving a credit score with on-time payments.

Aaron Crowe is editor at The edit Solution Program. He is a freelance journalist in the Bay Area who specializes in personal finance. He has been a writer and editor at newspapers and websites, including AOL’s personal finance site WalletPop.com, WiseBread, Bankrate, LearnVest, AARP and other sites. Follow him on Twitter at @aaroncrowe, or at his website, www.AaronCrowe.net.