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Building credit has long felt like an impossible catch-22: You can't borrow money until you have an established credit record, but you can't establish a credit record unless you've borrowed money.
This can be a big deal if you're young or haven't borrowed much. Even if you're perfectly responsible — routinely paying your rent and other bills on time — that's not the track record that counts in a conventional credit score. So when you need a loan or credit card, you may not even qualify, and if you do, you're likely to be stuck paying higher interest rates.
But scoring methods are changing. A new generation of credit scores uses AI machine learning and alternative data to get a more complete view of who's likely to repay their loans. This can mean considering rent and utility payments and measuring trends over time (like someone's progress on paying down their loan balances), rather than taking a snapshot of their status at any given moment.
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Opening doors to homeownership
Although lenders can already access these alternative scores to vet applicants for a credit card or auto loan, it wasn’t until this year that they made their way into mainstream mortgage financing. The Federal Housing Administration, along with mortgage giants Fannie Mae and Freddie Mac, said in April they would incorporate VantageScore® 4.0 and FICO® Score 10T — into their mortgage underwriting guidelines, permitting the market’s first new scoring models in decades. The goal: to make buying a home more accessible and affordable.
“It's absurd that someone can have a history of $2200 a month for rent but they want to buy a home for $1750 a month and can't,” Bill Pulte, the director of the Federal Housing Finance Agency, wrote on X last year.
The one hitch
The one catch is this: While both VantageScore 4.0 and FICO Score 10T will factor in rent and utility payments, they can't measure data they don't have. And this information isn't always reported to the credit bureaus — or even collected. In fact, even though rent payments have technically been scorable in some models for over a decade, many landlords don't want to incur the extra cost to report it, according to the Congressional Research Service.
That said, if you're a renter, you can sign up for a rent reporting service like Bilt or Esusu instead. It won't be free, but it could be well worth the money if you're still building credit. And you may be able to request automatic payment reminders as well.
So what?
If you've ever felt like the credit scoring system was stacked against you, this marks a major turning point. VantageScore says nearly 5 million more consumers are eligible for a mortgage under VantageScore 4.0. FICO says lenders who use FICO Score 10T can expand their mortgage approval rates by 5% without adding risk.
In other words, by rewarding more of your positive choices, these newer scoring models may help get you over the finish line.
Related Reading
What Is a Good VantageScore 4.0? A Guide for Renters & Property Owners (Esusu)
Why Do I Have Different Credit Scores? (SoFi)
How to Increase Your Credit Approval Odds (Experian)
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