Millennial Money: Make Leasing Work for Your Financial Goals

“Renting is just throwing money away.”

“Renting is like paying someone else instead of paying yourself.”

You may have heard these opinions from family and friends, but it’s not that simple. In some areas (looking at you, San Francisco), renting is much cheaper than buying a house. But leasing can be used to fatten your credit profile as a stepping stone to your financial goals.

MILLENIALS WANT TO BUY BUT FACE OBSTACLES

Millennials are delaying homeownership and staying in rentals longer than previous generations, according to several studies.

Student debt – that scourge of millennial existence – is a factor pushing back the age of homeownership. Rising rents and house prices, coupled with weak wage growth, also make it difficult to save for a down payment.

The vast majority of Americans – 9 in 10 – still equate ownership with personal success and economic security, according to a survey published in July by the Apartment List website. The survey of a nationally representative sample of people found that renters and landlords believe there is a social stigma associated with renting.

HOW TO MAKE RENT WORK FOR YOU

You cannot fully control how much money you earn. But your credit score — the key to qualifying for rewards credit cards, financing a car or even a home — is largely in your control. Rent payments can be used to increase your score.

For many millennials, rent payments are a great way to demonstrate responsible behavior to potential creditors. But rent payments — unlike credit card, mortgage, and loan payments — don’t automatically show up on credit reports. And your credit scores depend on the content of your credit reports.

There are two ways to add rent to your reports:

— ASK YOUR OWNER. Two of the three major credit bureaus — Experian and TransUnion — accept payment information from homeowners. Both offices’ websites have a simple process for landlords to register.

– DO IT YOURSELF. You can use third-party companies such as RentTrack, Rock The Score, and others to report rent payments directly to one or more offices for a monthly fee.

A 2017 TransUnion study tracked 12,000 renters for a year. Scores rose an average of 16 points in the six months since rent reporting began, says Maitri Johnson, vice president of multifamily at TransUnion. The biggest increase was for scores below 620, generally considered bad credit.

With rent reports, payments appear on your credit report like any other account. Positive payouts help your score; missed or late payments can damage it. If there are errors, you can dispute them with the offices.

WHAT THERE IS TO KNOW

Rent reports allow you to get credit for something you already do. Better credit can get you a cash back credit card or a cheaper car loan, saving you money in the short term and strengthening your finances in the long term. But the declaration of rents also has certain disadvantages:

— ALL CREDIT POINTS DO NOT COUNT IN RENT PAYMENTS. FICO 8, the score most widely used by lenders, and FICO versions used in mortgages do not use rental information to calculate scores. But newer versions, such as FICO 9 and FICO XD, do. VantageScore, FICO’s main competitor, also uses rental payment information.

“Even though it’s not something factored into your score, it’s still cosmetically on your credit report,” says John Ulzheimer, a credit expert who has worked at Equifax and FICO. “A lender considers the information to be in order and this will benefit you as an applicant.”

— THE DECLARATION IS NOT FREE. If you use a reporting service, you’ll pay a monthly fee ranging from $6.95 to $9.95 depending on the company, plus a one-time signup fee of $25 to $95. Extras like adding information about past rentals cost extra.

OTHER WAYS TO INCREASE CREDIT

Ulzheimer points out that traditional credit-building methods are more efficient than rent reports: They’re inexpensive, payments are typically reported to all three credit bureaus, and influence all types of FICO scores and VantageScores.

— You can become an authorized user on someone else’s credit card, preferably someone with a long history of responsible credit use.

— You can get a secured credit card, which requires an initial deposit. Charge a small amount each month and always pay on time.

— You can apply for a builder’s credit loan, available from credit unions. Your monthly payments are reported to the credit bureaus. The money you borrow is returned to you when the loan is paid off.

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This column was provided to The Associated Press by personal finance website NerdWallet. Amrita Jayakumar is a writer at NerdWallet. Email: [email protected] Twitter: @ajbombay.

RELATED LINK:

NerdWallet: How to Report Rent to Credit Bureaus http://bit.ly/nerdwallet-rent-and-credit

About John A. Provost

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