Your credit score – that three digit number that determines whether or not lenders trust you – takes into account everything you’ve ever bought, borrowed, paid for, or financed.
Well, almost everything.
You may prefer renting, but your credit doesn’t
Most people are familiar with this already. In economic terms, rent doesn’t “build equity”. The owner owns the capital, not you. Buying a house gives you equity, and the money you pay to maintain your house is not temporary.
However, what people may not be familiar with is that companies offering to report your rent history to credit bureaus are not offering what you think.
Keep in mind that nobody is suggesting companies that offer these services are scams. Rent Reporters, for example, actually has a quality reputation.
However, it’s important to understand how FICO (who calculates your credit score) builds their profile (from the data received by Trans Union, Equifax, and Experian). The companies that offer these services where rent can be calculated into your FICO, often only report to one bureau.
This is crucial because when you’re trying to fix your credit, and want to use that good credit to buy a new home, or a new car, the score looked at will be the score FICO calculates based on the data from all three credit bureaus. And all three credit bureaus typically have different information, which helps produce a different score.
In addition, FICO – like every other algorithm – itself goes through different models.
Utilities (such as cellphone bills, water and electric)
So you’re doing the right thing – paying off your cellphone, and your water and electric bill.
But at no point does any of this get calculated into your payment history. Even when you hear stories about how a new FICO model will include more things (like your cellphone bill), lenders are not required to adopt new models.
The toughest part is that while payment history in these categories never builds positive credit, it has the potential to build negative credit. Unpaid bills can go into collections. At that point collections can turn into suits filed against you. And such a process can be a nightmare.
Pro Publica recently looked into how wage garnishment typically affects 1 in 16 workers who have their finances seized over consumer debt.
One gentlemen, Kevin Evans, involuntarily paid almost $500 each paycheck due to a lawsuit filed against him. While most debt is medical in nature, debt buyers are becoming a critical piece of the pay seizures pie.
The Bad Credit You Never See
One of the things I emphasized in the recap of the Equifax saga is how crucial credit reporting agencies are to your credit score. Moreover, each credit reporting agency is crucial to how FICO calculates their score. Companies like Equifax is precisely who decides what data FICO uses.
The very first credit reporting agency began in 1899 and collected everything from store “receipts” to newspaper clippings.
In China, for example, your literal social network of friends can boost your FICO score. The most bizarre news about the relationship between Facebook and FICO came when the Financial Times reported how frequently using the word “wasted” on social media could damage your credit score.
FICO spokeswoman Christina Goethe responded to the report, denying the link, saying that “the headline about social media posts created a misperception. FICO is not utilizing Facebook data, or any other type of social media data, in calculating FICO Scores.”
FICO has made explicit plans to increase inputs for scoring. Normally this would be good news to people who rent, but never miss a payment. However, until lenders are required to use one model over another, good money won’t always lead to good credit.
Want to connect with a company that boosts your credit score without giving you fake friends and conditions you to stop using the word “wasted” on Facebook? Call the Credit Repairmen at 210-520-0796 for a free credit evaluation.
