There has been much discussion and several studies over the years regarding the potential value of leveraging rental data in assessing consumer credit risk. Which raises the question: Should rental data be widely reported to the three primary consumer credit agencies (CRAs)?
If rental data was reported, this might mean some consumers without loans or credit cards would get a FICO® Score, and gain access to more affordable credit. But how many? And how many of these consumers would be considered creditworthy by prospective lenders?
In 2015, FICO introduced FICO® Score 9, which scores rental data. This coincided with the first evidence of sufficient positive and negative rental data at the CRAs, a necessary condition for adding this data into the FICO Score algorithm.
Great news, right? Well let’s take a deeper look at some of the facts around rental data in the credit report.
Not Enough Rental Data in Credit Bureau Files Today
Much like with utility and telco data (covered in a prior Truth Squad blog, rental data is actually quite rarely encountered in consumer credit files:
- The US Census bureau estimates that there are 240 million adults in the US, with 35% living in rental housing.
- Of the roughly 80 million US adults who live in rental housing, we found that just 270,000 (or 0.3%) of those consumers have a rental trade line reported in their credit file.
- In fact, rental data makes up less than 1% of all the credit data being reported to the credit bureaus.
So while some have claimed that the inclusion in a credit bureau risk score calculation of rental data currently reported to the CRAs would significantly move the needle as far as scorable rates or access to credit, it’s just not the case.
Our research showed that only ~5,000 total consumers (out of 200+ million scorable files) became FICO scorable as a result of the inclusion of rental data currently found in their credit file. In the context of mortgage lending, a mere 1,795 consumers had scores that met the generally accepted FICO Score cutoff of 620 or greater once rental data was included in their score calculation.
Does Rental Data Make Thin Files Fatter?
Most mortgage lenders and the Government Sponsored Enterprises (GSEs) have underwriting standards that require a consumer to demonstrate experience in making payments on more than one tradeline — typically two to three tradelines. So perhaps the value of rental data is that it would allow more people to meet these criteria?
We checked how many consumers have a FICO® Score above 620, and have two or three tradelines reported to the CRA where one of those tradelines is rent. There were 280 people with two tradelines, one being rent, and 110 people with three tradelines, one being rent. That’s great news for these 390 individuals, but it shows that rental data currently reported to the CRA does not have a significant impact on access to credit.
Fact: The reporting of rental data has not reached meaningful volume such that inclusion of this data presently has a material impact on the total number of scorable US consumers or access to credit.
How Do We Get More Rental Data to Score?
Rental data does have potential to improve credit access, but not until much more of it is reported to credit bureaus. So why do we see so little rental data being reported?
The challenges of achieving broad national scale in rental reporting are significant. The first is the disaggregation of the furnisher market — much of the rental market is single property landlords. The second is a regulatory compliance hurdle — there is a general aversion among potential furnishers to take on the operational and compliance risks posed by becoming a CRA data furnisher.
We would encourage policy makers to support the broader inclusion of rental data at the CRAs to support consumers’ access to affordable credit. Should rental data start to flow into the credit report in meaningful volumes, the FICO® Score 9 algorithm can reward consumers for their successful history of on-time rental payments.
In the meantime, scores like FICO® Score XD — which analyzes non-traditional credit data found outside of the credit report — provide an onramp to mainstream credit for people with limited credit experience.
For more plain facts on credit scoring, see the other posts in our Truth Squad series.