by Emily Selch
The simple way multifamily providers can support wealth building for renters is to help them build credit.
Whether it’s purchasing a home, renting an apartment or starting a small business, a good credit score is essential to consumers’ credit access and long-term economic mobility. Low-income renters have been largely cut out of traditional credit building mechanisms, because multifamily housing providers have not historically reported on-time rent payments – making building a solid credit score daunting, if not impossible.
The absence of positive rent payment history in credit reporting not only hinders renters’ long-term economic mobility, but it also contributes to worsening racial inequity as minority homeownership continues to lag behind white homeownership.
The historical obstacles renters face in building credit
Reporting on-time payments may not have been a responsibility that landlords have historically been tasked with, but they are uniquely positioned to help tenants overcome barriers to building credit history, which, in turn, will support their own portfolio returns.
Today, there are only a few options to build a credit score that don’t rely on traditional banking, such as working with nonprofit organizations that offer low-balance, affordable loans that are reported to the credit bureaus. However, the most common ways to build credit, including obtaining a credit card, paying a student loan over time, or getting an auto loan, may be out of reach for many low- to moderate renters.
What the multifamily industry can do to help
The multifamily industry can and should play a significant role in shifting the credit reporting paradigm. As opposed to traditional credit building mechanisms, encouraging landlords to report on-time payments to credit bureaus is both a practical and valuable way for renters to improve their credit and for landlords to increase their revenue, lower eviction rates, and stabilize their renter base. With the help of organizations like the Housing Lab, innovative, scaleable and cost effective industry solutions are already coming to the market.
A recent California law (S.B. 1157) demonstrates that on-time rental payment reporting could be the key to unlocking credit building opportunities for low-income renters. It’s the first state law that requires medium to large subsidized multifamily providers to give their tenants the opportunity to have rent payments reported to a credit bureau.
Before this legislation, California’s 16 million renters have only seen their rent negatively affect their credit score; failure to pay rent on time is reported, but renters are never rewarded for on-time payment. But now California renters have the option to opt into regularly reported payments for a fee (a maximum of $10 per month), effectively allowing them to improve their credit score and credit history. Credit Builders Alliance, a co-sponsor of the legislation, estimates that the law will positively impact 500,000 Californian renters with a poor credit score.
An important step in the right direction
While California’s latest legislation may not be a perfect solution, it takes the first important step to helping low-income renters build (or even rebuild) their credit.
Congress, fellow state legislatures and the multifamily industry at-large should take note of California’s initiative as it lays the groundwork for systemic changes to credit reporting that would expand access to traditional consumer lending services to low- and moderate-income households, support all renters’ positive economic mobility and contribute to the long-term reduction of the racial equity and homeownership gap.
Emily Selch is working with Simpson Impact Strategies as a Research Associate. She is currently a graduate student in the Masters of Public Policy program at the University of Chicago, where she studies data analytics and mapping to better understand place-based investments in housing, transportation, and criminal justice.