The use of alternative data — like on-time rental payments — could help borrowers boost credit scores

Monique Drayton in Washington, D.C., was living for years with bad credit. When she lost her full-time job, she said it felt like everything fell apart. 

“Not having a good credit score, it’s like being empty inside,” she said. “I didn’t feel valued.”  

But Drayton had a plan. In 2016, she and her two children moved into public housing with the intention to save money and pay off debt.

For Americans like Drayton, who resort to paying with credit cards after a job loss, it can be hard to bounce back from negative credit score hits, even when their financial picture improves.  

The credit score, which relies on things like credit card applications and the total amount of debt owed, can provide a limited view of a person’s finances. 

Some academics believe more data should be added to the score. 

“What I would like to see is that we do explore alternatives,” said Lindsay Sain Jones, an assistant professor of legal studies at University of Georgia’s Terry College of Business.

Sain-Jones said a more inclusive credit score could weigh payments more logically associated with a borrower’s credit risk. 

“Things like utility payments, checking and savings account balances, account history, rental payment histories,” she said. 

In the U.S., 44 million households rent their homes. If they reliably pay rent, they don’t always have the benefit of having that reflected in their credit scores. 

In 2020, Monique Drayton joined a D.C. Housing Authority program that aims to change that. Drayton said the program helped refocus her mindset, bringing her “back on the journey” to homeownership.

Paying rent on time improved her score through the three main credit bureaus, TransUnion, Equifax and Experian. 

Drayton gradually boosted her credit score into the 700s, using those rent payments, and by disputing errors on her report. In May 2021, Drayton moved into her newly purchased home.

“I’m living my dream. I’m living my dream now,” she said. 

The practice of rent-reporting is spreading. Last month, Freddie Mac said consumers could use on-time rental payments to help qualify for a mortgage loan. VantageScore and FICO include rental data when available.

But the inclusion of alternative data is still unusual in credit scores, and it’s not a solution to the discrimination within the credit scoring system, said Pamela Foohey, law professor at Yeshiva University’s Cardozo School of Law. 

“Alternative credit scores are elevated as a way to solve this problem,” Foohey said, adding that framing more data as a solution misses a bigger point.  

“It detracts from thinking about larger disparities, both historical and ongoing, that are feeding into the traditional credit scoring system. It’s kind of like putting a band-aid over something that is a huge gaping wound,” she said.

Foohey believes we need new economic policies, like guaranteeing certain loans, or utility bills, to give marginalized communities who don’t have generational wealth a “leg up.”

“Put them on a path of credit success,” she said. “And then the credit scores themselves will be more reflective of people’s relative ability to pay going forward.” 

Chi Chi Wu, staff attorney at the National Consumer Law Center, said there’s some promise to including alternative data in credit scores — with safeguards. 

“Rent reporting and utility reporting have to be done in a way that it only reports the positive information, and that it’s done only with the tenant or the consumers’ voluntary opt-in and knowing consent,” she said. 

Wu said it’s important that adding more financial data does not put consumer privacy at risk. 

As we know, more data means more power.  

Related Links: More insight from Kimberly Adams

Professor Pamela Foohey has an article on alternative data and its downsides. We also have to credit Sain Jones’s analysis (co-written) on the use of “fringe” data, like how someone uses social media, as a means of determining creditworthiness.

Sounds a little like that “Black Mirror” episode, right?

And, as Sasha mentioned, Freddie Mac is including on-time rental payments for underwriting, starting July 10, less than a year after Fannie Mae rolled out a similar proposal. Those two government-sponsored enterprises, as they are called, guarantee most of the mortgages in the U.S.

HousingWire has an article on it that acknowledges the potential for Freddie Mac to “pluck” proof of payments from apps like Zelle, Venmo and PayPal, in case you pay your landlord on your phone, rather than by check.

Besides rent being added, most medical debt is being wiped off credit reports. CNBC reports the three credit bureaus are now allowing paid-off medical debt to be removed. Those debts used to represent 58% of the debts in collections, and lingered on credit reports for up to seven years.

With the change, some consumers could see their scores rise earlier than expected.

For more, see the rest of our coverage of the algorithms behind credit scores, and how they can shape your financial life.

Clarification (July 20, 2022): The list of companies that use rental data has been updated in this web story.