According to the Financial Consumer Agency of Canada, rent and household-related expenses should not exceed 35% of your income. Thirty-five percent of your income is not an insignificant amount of money, which is why it is baffling that such a large and regular expense has not counted toward renters’ credit scores until recently.
The Landlord Credit Bureau (LCB), a rent reporting agency, and Equifax, one of the two main credit bureaus in Canada, are teaming up to solve this problem and help renters build their credit scores.
To do this, landlords — also known as the creditor — report the rent payment history to the LCB to collect. They send the data to Equifax, who then files this information on the tenant’s consumer credit report.
However, it is important to note that Equifax is currently the only credit bureau collaborating with the LCB, which means rent may not apply to credit scores through other bureaus or credit monitoring sites.
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. This way, the renter can also ensure the landlord is reporting accurate information. They can check their history and leave comments.
Similarly, the LCB verifies identities to ensure information is correct and manages disputes.
As the payments are reported, renters 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.
Building credit is now 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.
As for those who may have trouble paying their rent during the COVID-19 pandemic, the LCB encourages landlords to offer responsible tenants 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.
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 you use (debt) against the total amount of revolving credit you can access (your total available credit limit).
The key word here is revolving credit. 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.
Staying below 30% of your credit utilization ratio 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.
4. Credit mix
This section will show lenders how you manage different credit products.
When you seek credit, your lender will typically request your credit report, resulting in a hard inquiry and can temporarily impact your score. Many 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 use credit responsibly and make payments on time, you will likely see improvements to your credit score.