Does Rent to Own Help Your Credit?

by Ciaran John, Demand Media
    Rent to own agreements generally don't impact your credit score.

    Rent to own agreements generally don't impact your credit score.

    You can use rent-to-own arrangements to buy TVs, furniture, cars and even houses. As with a mortgage or car loan, you normally make a monthly payment for a set period of time. However, while timely mortgage payments may help your credit, your rent-to-own payments usually have no impact on your credit score at all. If a rent-to-own agreement does appear on your credit report, its usually going to hurt rather than help your score.

    Credit Reporting

    The consumer credit reporting agencies, Equifax, Experian and TransUnion, are all subject to the Fair Credit Reporting Act. This act lays the ground rules for what finance firms can report and how credit bureaus use that information. Mortgages, credit cards and automobile loans are conventional credit products that can appear on your credit report. Rent-to-own agreements aren't technically credit agreements because you're renting or borrowing something rather than buying it. Rent-to-own deals work like cell phone plans because you take possession of something and enter into a payment plan but you're not borrowing money.

    Reporting

    Finance firms and individuals must meet certain requirements before the credit bureaus consider their information in your score. For example, if you buy an owner-financed home from an individual, it's unlikely the owner is willing or able to report the loan to the credit bureaus. Stores that arrange rent-to-own TVs and furniture typically don't meet these requirements. There is one possible exception in the auto industry. Some lease agreements include rent-to-own provisions that will be listed on your credit report. Late payments on a lease can hurt your score just as much as a missed mortgage payment.

    Alternative Credit Reports

    In 2011, Experian launched the Rent Bureau Division to gather information on residential rental agreements. If you buy a home with a rent-to-own deal, it's possible the landlord may report the arrangement to Experian. However, this report is not to be confused with the standard credit report lenders use to judge applications for credit cards and loans. For one thing, the rent report is limited to positive payment information. Other firms compile consumer reports that include details of utility payments, cell phone plans and rent-to-own agreements. However, lenders typically only use the traditional credit when it comes to making borrowing decisions.

    Considerations

    A rent-to-own agreement of any kind could make its way onto your credit report if you end up breaking the lease. If this happens, the owner may take you to court. Credit bureaus regularly check court records for judgments and liens and that information does get added to your credit report. Unsurprisingly, a bad debt or judgment can cause your score to plummet since lenders are wary of people who fail to settle their debts.

    About the Author

    Ciaran John began writing in 1994 with contributions to "The Hourly Press" and "The Sawbridgeworth Observer," and has since written for many online and print publications. He has 12 years experience working for financial services companies as a business banker, lender and investment representative and spent four years working in human resources.

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