How to use rent payments to build your credit score in Canada

This article has been updated from a previous version.

According to the Financial Consumer Agency of Canada, rent and household-related expenses, including home insurance, should not exceed 35% of your gross monthly income. Thirty-five percent of your income is not an insignificant amount of money. It’s surprising that, until a couple of years ago, such a large and regular expense didn’t count toward renters’ credit scores.

In 2020, the Landlord Credit Bureau (LCB), a rent reporting agency, and Equifax, one of the two main credit bureaus in Canada, teamed up to solve this problem in order to help renters build their credit scores. To do this, a landlord — also known as the “creditor” — reports the rent payment history to the LCB to collect. The LCB sends the data to Equifax, who then files this information on the tenant’s consumer credit report.

Equifax is currently the only credit bureau collaborating with the LCB, which means rent payments may not apply to credit scores through other bureaus or credit monitoring sites. The service is also not available in Quebec. Borrowell now offers a similar service, allowing tenants to report their rent payments to Equifax for a $5 monthly fee.

How rent payments are reported to credit bureaus

When the landlord records past or present tenancy with the LCB, the tenant receives an email encouraging them to log in and review their record. Tenants can check their history and leave comments, and they can also request a rent receipt from their landlord to prove their rental payments for each month. This way, the renter can also ensure the landlord is reporting accurate information. Similarly, the LCB verifies identities to ensure information is correct, and manages any disputes.

As the payments are reported, the renter can start to build, improve, or repair their credit score and, in turn, access lower interest rates down the road when applying for a mortgage, car loan, or other credit product. Plus, as renters develop a good tenant history, they can receive preferred tenant status and look favourable to future landlords.

This record can also help landlords avoid delinquent or destructive tenants, offering a win-win situation.

Making credit building more accessible

Since landlords often require a credit check, those with no credit history or less than ideal credit scores may find it challenging to get approved for housing.

However, poor credit doesn’t necessarily mean tenants have trouble paying their rent. This sentiment is especially true for new credit-active individuals, those looking to rebuild their credit, and newcomers to Canada.

When renters build their tenant records with the LCB, landlords can see the payment history and tenant status, improving approval rates for suitable applicants and sorting out bad tenants.

Landlords can also secure a line item on the tenant’s credit report with Equifax, which can impact the renter’s credit rating. Like other credit products, late payments can leave negative information on the consumer’s credit report and influence credit scores.

However, good tenants will see the reward in reporting their payment history with improvements to their credit rating.

For responsible tenants who may still have trouble paying their rent due to the COVID-19 pandemic, the LCB encourages landlords to offer payment plans that will continue to improve credit scores.

Additional ways to build credit

Although the LCB and Equifax partnership is an excellent step in the right direction, relying solely on rent to build your credit score is not recommended for a few reasons.

Reporting

Currently, rent is only reported to Equifax, which means it may not impact your credit score through other credit bureaus in Canada and may not factor into your credit rating at a bank.

Calculating your credit score

Each credit bureau uses a unique calculation to determine your credit score; however, they generally use a combination of these five factors:

1. Payment history

This information will include any payments you make as agreed (on time and in full), as well as any missed or late payments.

Late payments will work against you; however, making payments on time can improve your score.

2. Credit utilization ratio

Your credit utilization ratio is the amount of credit (debt) you use compared with the total amount of revolving credit you can access (your total available credit limit).

The key word here is revolving. Revolving credit is money you borrow, pay back, and can borrow again, up to a limit. For example, a line of credit or a credit card would fall into this category, but not rent.

Keeping your credit utilization ratio below 30% can have positive impacts on your credit score.

3. Credit history

This factor includes details on past and present credit accounts and how long they have been open.

Typically, it’s the accounts with a long history that can benefit you the most. This is why it’s not advisable to cancel your oldest credit card.

4. Credit mix

This will show lenders how you manage different credit products.

5. Inquiries

When you apply for credit, your lender will typically request your credit report, resulting in a hard inquiry, which can temporarily impact your score. Many hard inquiries in a short period can signal an urgent need for credit — indicating risky lending behaviour.

Requesting your credit report will not result in a hard inquiry but a soft inquiry and won’t affect your score.

Applying for credit only when you need it can help you maintain your rating.

Managing your credit

Having more than one credit product, like a credit card, for example, can improve your rating. This way, you won’t rely on one creditor to report your information to the credit bureaus and you will add to your credit mix, payment history and, of course, credit history.

Additionally, choosing a revolving credit product will ensure your credit utilization ratio can factor into your rating.

If you continue to avoid credit score pitfalls and make payments on time, you will likely see improvements to your credit score.

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