Millions of private tenants can boost their credit rating by opting in to a new scheme that records if you pay rent on time and sends the results to credit reference agency giant Experian.
But some may be put off by having to pay rent via a third party, and because late payments will dent their rating.
This is a Q&A to explain how the Rental Exchange scheme works, and detailing the pros and cons. For full info on how to improve your credit score, read our Credit Boosting guide.
Why would rent payments make a difference?
- On time and late rental payments will be recorded on your Experian credit file. Under the scheme, rent payments will be recorded on your Experian credit file like loans, mortgages, credit cards and other similar bills. It doesn't mean it'll be on all your credit files, though, as Experian is one of three credit agencies. The others, Equifax and Callcredit, aren't recording rent yet.
- How does this affect my chances of getting credit in future? When you apply for credit, lenders check your credit file, which includes a history of bill payments – those made on time make you look more attractive to lenders, giving you a better acceptance chance. Often, having just one missed payment in the past couple of years can kibosh your chances.
- When lenders search your credit file, how will they judge rent payments? Some major banks have tentatively confirmed to us that they are likely to use rental payments in their lending decisions, though it's too early to say to what extent.
Lloyds Banking Group says: "Rent could prove useful in making lending decisions though we would need to further assess how best to use this". Barclays says: "Any positive movement in a customer's Experian score has the potential to improve our view of a customer". HSBC refused to comment, while we're awaiting answers from Santander.
How does Rental Exchange work?
- You pay rent to a third party called Credit Ladder. It's done via standing order set up for the day your rent is due. It then passes the rent onto the landlord or letting agent the same day.
- Credit Ladder then reports your payments to Experian. Once the payment is made it reports whether it's on time or not to Experian, which updates your credit file.
- But it may be months before you see it on your file. The Rental Exchange scheme is still in its infancy and so isn't yet fully functional. The data will be logged immediately, but neither you nor lenders will be able to view rental payments until the end of 2016 on Experian reports. However when it becomes visible, you and lenders will be able to see back to when you first set it up.
- What is Credit Ladder? It was set up in March this year specifically to provide this service and is owned by online estate agent Make Ur Move. It's acting in partnership with Experian on this scheme, so while the two companies are not part of the same group they are working together.
Not signing up won't have any negative consequences. Your rental payments won't be recorded, that's all.
- Any private tenant can sign up for free now. Regardless of who their landlord or letting agent is, be it a large corporation or private individual.
- Is there a catch? A possible snag is that consent must be given by your landlord or letting agent before you're accepted onto the scheme.
- It could be especially useful for students and young people. They in particular may benefit from this scheme as it's an opportunity to prove they can pay on time, and as many are just starting out on their own financially, they may have little credit history. Having no record of payments means lenders know little about you, making it difficult to secure credit in future.
A similar initiative was launched in 2014 for social housing tenants who are automatically signed up by their housing association, however, these tenants are given the opportunity to opt out of the scheme. Experian says 20% of social housing tenants in the UK are currently signed up to the scheme.
Does it cost me anything?
- There are no fees from Credit Ladder. Neither the tenant nor landlord pays anything to Credit Ladder.
- Could landlords charge tenants an admin fee for the work they must do? There is always a risk certain landlords or letting agents may charge a tenant an admin fee for the service – so check first. Experian tells us it's had conversations with a number of letting agents and none have said they will charge for the service, but there are thousands of landlords so there may always be those who see this as an opportunity to charge.
How do I actually sign up?
Here's how it works:
- You need to register at Credit Ladder.
- You let it know who to pay, how much and when, by filling in an online registration form.
- That information is then verified by Credit Ladder with your landlord or letting agent. Credit Ladder will also ask whether your landlord has any objections with you signing up to the scheme. It's worth letting your landlord or agent know first, especially smaller landlords who may not have heard of this scheme.
- You then start to pay rent to Credit Ladder. Your landlord or letting agent will receive the rent on the same day and your rent schedule will be updated in your account to show the payment has been received.
If your rental agreement changes, eg, the rent goes up, you must do some more work:
- You must get in touch with Credit Ladder to adjust the payment amount or date. It will then verify this with your letting agent or landlord.
- When your tenancy agreement comes to an end you should cancel the standing order with your bank and inform Credit Ladder.
I live with other people, how are rental payments recorded?
You can only sign up to this scheme as an individual, regardless of whether you're on a joint tenancy or not.
Each person's portion of the rent is recorded on their file and their file alone. Anyone in the property is able to sign up, and they will be judged on their own payments only.
If there are more than one of you and the money comes from a joint account, and you're all signed up to the scheme, the payment will be assumed to have come from all of you and therefore will be recorded on all your files.
I live with other people - will I become financially linked to them on my credit file?
Signing up will not financially link you to someone else, according to Experian. This is because everyone is treated as an individual – even those with a joint tenancy.
The danger of being linked financially with someone with a poor credit history is it could harm your own credit rating. Usually the only way to be linked to someone else is by opening a joint account such as a bank account or mortgage.
Can I trust Credit Ladder, given I pay it my rent?
We can't answer that for you, but here are the facts to help you make a decision.
- Where is my rent money held before it's paid to my landlord/letting agent? It's held in a separate client account with a major high street bank, so it won't be mixed up with Credit Ladder's other cash, we've been told. It belongs to tenants and landlords, not to Credit Ladder.
- If Credit Ladder went bust what would happen to my cash? If all goes well, money will only be in that account for a few hours at most so it may not even have your cash if it were to go bust. If you were unlucky and it did have the money at the point of insolvency, it could not be used against that insolvency, according to Credit Ladder. That said, customers' money is often lost during insolvencies so there's no guarantee.
- How does Credit Ladder make money? It insists it doesn't make a penny yet and is propped up by private cash, adding that its short-term motive is to build a reputation in this area first. Experian says it doesn't pay Credit Ladder a penny, despite it benefiting from the data. Some of our forumites questioned whether Credit Ladder would be selling on this data to third parties but it denied this.
- What's in it for Experian? It says its motive is to gain a competitive advantage over its rivals by including this data, which they don't have. That makes it more attractive to lenders to encourage them to search people's Experian credit files rather than their Equifax or Callcredit files.
- What happens if Credit Ladder makes an error? If it made a mistake causing rent to be paid late and triggering a late payment fee from the landlord or letting agent, if the error was its fault it says it would reimburse any "reasonable costs". It adds if the mistake was its fault it wouldn't record a late payment on your credit file.
If you want to dispute a black mark on your credit file applied by Credit Ladder, the process is the same as if it were applied by a bank. First complain to the firm that applied it and then add a 'notice of correction' on your credit file. See our Credit Boosting guide for how to correct errors.
I'm a landlord. How am I affected?
You won't have to pay if your tenant decides to sign up, and there are no charges when the rental agreement changes or comes to an end, or at any point in the process.
The only thing you need to do is verify the details when contacted by Credit Ladder.
Will other credit rating agencies offer this service for renters?
A spokesperson for Equifax told us it "recognises the benefit" of providing rental payment information in credit reports and it is working with the rental market on how it could do this. However, it currently does not have timescales for when this information may be included in a renter's credit file.
Callcredit, which is the other major rating agency, has confirmed that it does not currently offer a similar scheme, but is looking into doing so in future.
There are currently around 5.4 million UK households renting, and Experian estimates that more than 90% of private tenants pay on time. Its research also shows that of the 1,500 renters it surveyed last October, 76% said they would like their rent to be visible on their credit report.