It’s time to make rent count when assessing creditworthiness
Have you ever wondered if your credit report reflects your rental history?
Given over half of people living in London rent their home, it might surprise you to learn that no matter how good you are at paying your rent on time, this isn’t necessarily reflected in your credit report.
Why does this matter? Your credit report has an important role to play in how you access any type of credit –whether that's a credit card, mobile phone contract, white goods financing, or a future mortgage.
It acts like a financial CV, and lenders use it to help determine whether they should lend to you, and at what rate.
There are 11m renters in the UK in private rental and social housing. The private rental sector has grown steadily over the past 10 years (up from 12 per cent of UK households in 2005/06 to 20 per cent of households in 2015/16). And according to the Resolution Foundation, up to one third of millennials could be renting for life.
Rent is usually someone’s biggest regular outgoing, so their track record is a useful indicator of their ability to pay a mortgage.
It’s time for credit reports to catch up to reflect their payment record and ability to pay. And good progress is being made towards this goal.
The collation and reporting of rental payment information, particularly when it comes to privately owned properties, is currently very patchy.
The good news is that there are important developments underway to facilitate the sharing of this information.
HM Treasury has recently announced the winners of its Rent Recognition Challenge, which offered a £2m prize fund for apps and services that help tenants record and share their rental payment data with both lenders and the credit reference agencies responsible for credit reports.
The winners are Bud, an AI-driven rental recognition tool that will allow banks to ingrate it into their apps; CreditLadder, which allows tenants to report their rent payments, and landlords and letting agents can introduce their tenants to the platform; and RentalStep a landlord-tenant matching platform, which allows landlords to purchase a tenancy management service, and rental payments to be tracked and reported.
The competition highlighted the depth and strength of the UK fintech sector and a variety of distinctive approaches to the rental data challenge.
We believe it’s right for there to be various options available and promoted as different solutions will appeal to different people. Renters, for example, have different requirements to landlords.
Capturing rental payment data is also a key objective of the Creditworthiness Bill, currently making its way through parliament.
As the Bill’s sponsor, Lord Bird, founder of the Big Issue, has said that "making rent count" will help to open up access to affordable credit to a wider pool of responsible borrowers.
Helping tackle financial exclusion is also a priority for our business, and it’s great to see the profile of this important issue being raised by Lord Bird’s work.
At the moment, lenders can try to piece together rental data from bank statements, but this is a manual and complicated process.
It’s impossible to tell for certain that a payment is being made to a landlord, is for the right amount, or whether it’s for an individual or for a group of people living together.
These nuances mean it’s vital to get the approach to incorporating rental data into credit reports right.
If a payment has been missed because of a dispute (such as a landlord failing to fix a broken boiler), this needs to be recorded on an individual’s credit report.
If there is a reason why a payment hasn’t been made, this should be left out of reporting where appropriate.
Rental data sharing goes hand in hand with other exciting developments like Open Banking, which are bringing together traditional financial service companies with new business models and fintechs to deliver better services for consumers.
These changes also promote a more responsible lending environment.
Lenders want to access as much relevant information as possible to help them assess whether the product a consumer is applying for is suitable for that individual, a key topic of focus for the UK’s financial regulator, the Financial Conduct Authority.
Fuelled by user friendly services innovative apps can offer, and the appetite from lenders to use this information, coverage of rental data will grow.
If the industry continues to work together to increase awareness of the importance of credit scores, and how consumers could get "mortgage ready", we’re confident there will be a fundamental shift allowing more people to access credit when they need it.