Housing remains the most significant expense for consumers in the U.S., with high rents and home prices posing obstacles for potential homebuyers. However, access to affordable credit presents another significant roadblock. An estimated 50 million Americans fall into the category of “credit invisible,” meaning they do not have a credit file or score. This lack of credit history makes it challenging for them to qualify for mortgages, credit cards, or other forms of financing. Priscilla Almodovar, the CEO of Fannie Mae, explains that this term refers to individuals who have not interacted with the credit system, whether due to a nonexistent or thin credit file. This issue disproportionately affects those who are new to the country, as well as Black, Latino, and young individuals, particularly millennials, who are driving the current housing demand.
The Role of Positive Rent Payment Reporting
While consumers with thin credit files may lack traditional credit history, they often have a track record of paying rent on time. Recognizing this, Fannie Mae launched its Positive Rent Payment Reporting initiative in 2022, allowing rent payments to be counted by credit rating agencies for free. This program has helped level the playing field, enabling more consumers to access credit opportunities. By collaborating with providers like Esusu Financial Inc., Jetty Credit, Rent Dynamics, and others, Fannie Mae has paved the way for rent payments to contribute to credit visibility. Other rent-reporting firms also offer similar services, reporting rental payments to major credit bureaus either for free or a modest fee by analyzing bank statements.
The inclusion of rent payments in credit reports has proven to be beneficial for consumers. According to a 2021 TransUnion report, individuals typically see an average increase of nearly 60 points in their credit score when rent payments are factored in. Fannie Mae’s pilot program has successfully aided over 35,000 participants in establishing credit scores. For those who already had a credit score, the program led to an average score improvement of up to 40 points. Joe Grande, a Florida resident, saw his credit score rise by 80 points within three months of signing up for rent reporting through Esusu, bringing him closer to his goal of homeownership. Experts highlight the significant impact of including rent payments in credit reports, equating it to jumpstarting a car with a truck battery.
While programs like Fannie Mae’s Positive Rent Payment Reporting can expedite the process of building credit, experts emphasize the importance of patience and consistency. Establishing a credit profile usually takes around six months, with additional time required to establish a solid repayment track record. Credit scores typically range from 300 to 850, with scores below 670 perceived as higher risk by lenders. It is crucial for individuals to review the costs and terms of rent-reporting companies before enrolling in such programs. Understanding which credit bureaus the information will be reported to can impact the effectiveness of the initiative, as reported payments should ideally reach all three major players: Equifax, Experian, and TransUnion.
Initiatives like Fannie Mae’s Positive Rent Payment Reporting provide an innovative solution to the challenges faced by credit invisible Americans. By leveraging rent payments as a means to establish credit, more individuals can access financing opportunities and work towards their homeownership goals. While these programs offer a valuable pathway to building credit, it is essential for participants to approach credit-building responsibly and understand the long-term commitment required to establish a strong credit profile.
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