It’s interesting that when people have a mortgage and pay on time (or late), their payment information shows up on their credit report right away—but if those same people are renting, they don’t earn any credit for their on-time payments. What if they did? What if, in paying their rent on time, residents earned a boost to their credit score? How could property managers and owners incentivize renters to pay on time while creating an additional revenue stream by offering a rent-reporting service?
Why Isn’t Reporting Rent Payments Standard?
It turns out, this is possible. The Fair Credit Reporting Act was amended in the early 2010’s to allow for the reporting of rental payments since a signed lease serves as the legal debt obligation. However, while that change in legislation should have opened the floodgates for rental payment reporting, there were a few problems:
- Obtaining a license to report to one credit bureau is a long process, riddled with a significant amount of paperwork.
- There’s no short-term incentive for an already-busy property manager to add credit reporting to their workload.
- The data processing and formatting requirements are extremely complex.
The three main credit bureaus—Experian, Equifax, and TransUnion—do allow for a service called “data aggregation.” That allowance was the genesis of CredHub. Before we delve more deeply into CredHub, let’s look at a month-in-the-life of a property manager and what it would look like to add rent reporting to their plate.
How Does Rent Reporting Help Property Managers?
Most property managers spend the first week of the month collecting rent. Often, they track their properties, residents, and payments in property management or accounting software like Rent Manager. They spend the second week of the month tracking down late tenants via email, phone, or in-person visits. If a resident falls too far behind on their rent, property managers may have to post a notice or even initiate an eviction. In the meantime, they have occupants moving out, maintenance requests, units to clean and show, new resident applications to process, new tenants moving in… the list goes on. Clearly, there’s very little downtime in the monthly property management cycle.
According to the Kurz Group, rental delinquencies in recent history hover around 17%. However, this number increased during the COVID pandemic. Imagine if you managed 1,000 residential units and had to contact 170 tenants each month to collect the rent. That’s a lot of time spent tracking down the money you’re owed when you could be building your business. By implementing a rent-reporting protocol, you can help prevent these delinquencies. This will help lower the number of late payments you have to track down and save you time.
A Quick Case Study
An early iteration of CredHub piloted a program with a property management company in the Pacific Northwest. Working with CredHub, the company dropped their delinquency rate from 8.7% (which was already good) to less than 2%. They managed roughly 1,500 units during the period measured (see the graph below).
Although it took time, the management company’s staff went from following up with about 130 residents per month to fewer than 30. The owner summed up the effect with a great analogy. They called the positive aspect of reporting “a carrot,” and the negative reporting “a stick.” That is, renters are incentivized to pay on time because it will help their credit score (carrot) while paying late will negatively impact their credit (stick). Reporting their residents’ rent payments ended up solving a couple of problems for them:
- Improved cash flow. Assuming an average rent of $1,000, that’s a $100,000 improvement…per month!
- Reduced the number of hours spent each month chasing down late rent payments. Assuming 1.5 hours per resident, that’s a savings of 150 hours each month.
How Does Reporting Rent Benefit Renters?
While this property management company certainly experienced the positive impact of reporting rent, their tenants were also encouraged by their on-time rent payments improving their credit scores. CredHub saw similar results to those reported in USA Today: residents’ credit scores went up by an average of 42 points.
What kind of reward is that for a renter? A better credit score equates to lower interest rates on credit cards and other loans, meaning lower payments and more disposable income.
The specific property management company referenced earlier here was also able to add a nominal charge to the leases for its rent-reporting service. The charge added approximately $3,000 of additional monthly revenue, on top of improved cash flow and reduced hours spent pursuing delinquent payments.
Why Do You Need CredHub?
You might be asking yourself, why wouldn’t I just report rent payments to credit unions myself? Well, that’s the tricky part.
Credit bureaus have a lengthy and cumbersome process for businesses to become credentialed with them. Plus, you must go through the process with each of the three bureaus: Equifax, TransUnion, and Experian. The amount of time a property management company would have to invest on the front end to see results is likely too much to justify the ROI for undertaking the effort.
Enter CredHub. We saw a need and invested in a software-as-a-service platform that integrates with property management software like Rent Manager. CredHub takes care of the data processing and formatting required by the credit bureaus and lends itself to an easy review process that takes about 15 minutes a month.
If you’re a property manager looking to improve delinquency rates, improve cash flow, save time, and reward on-time payments, look no further than CredHub—we give credit where credit is due.