Debt Relief Experts
In a country where owning a home seems like a distant dream for many young Canadians, the federal government is proposing legislation to protect renters’ rights and make housing more attainable for millennial and Gen Z renters. According to Statistics Canada, in 2021, there were 5 million renter households, a significant increase from 4.1 million a decade ago. An RBC Economics study revealed that young Canadians make up the largest share of renters.
According to our 2023 Joe Debtor study, higher house prices have resulted in a decline in homeowner insolvencies. As a result, insolvent debtors are currently predominantly renters (96% in 2023).
One proposed solution in the renter’s bill of rights is to mandate credit reporting for rent. While this sounds like a good idea, we fear it may have unintended consequences.
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Proposed government measures around credit teporting
The government has proposed a Tenant Protection Fund that would put $15 million over five years toward legal services for tenants. They propose to crack down on rent increases and renovictions, introduce a country-wide standard lease agreement and require landlords to disclose the history of an apartment’s rent through the credit bureau.
The theory is that for years, tenants have had to pay rent every month, but unlike other financial obligations that boost credit scores, rent payments haven’t counted toward credit history. This gap has caused issues for tenants who pay rent on time but have low credit scores, making it hard for them to find housing because landlords often rely on credit scores to judge trustworthiness. As a result, tenants haven’t had the chance to use their rent payments to improve their credit.
The Credit for Paying Rent Initiative will now allow tenants to build credit through their monthly rent payments. By including renters’ timely payment history in mortgage assessments, the government hopes to make it easier to qualify for mortgages, maybe even at lower rates. This move has support from industry groups like the Canadian Bankers Association and Credit Canada.
However, we wonder if the implementation is feasible and whether it will make a difference in terms of the ability to buy a home.
How credit bureaus work
In Canada, your credit information is reported to credit bureaus by lenders and creditors with whom you have financial relationships, such as banks, credit card companies, and mortgage lenders. They provide details about your credit accounts, payment history, credit inquiries, and public records like bankruptcies. This information is compiled by major credit bureaus like Equifax and TransUnion into your credit report, which lenders use to assess your creditworthiness when you apply for new credit.
To file payment history with the credit bureaus, creditors must establish a service agreement with each credit bureau. Currently, credit bureaus require a minimum number of active accounts and consistent monthly reporting. Creditors must also provide data in a technical format that the credit bureaus, or an intermediary processor, will accept. These technical requirements are very specific; it’s not just about sending a note that John Smith didn’t pay this month.
How long does it take to have your debt reported to the credit bureau? In a recent episode of Debt Free in 30, Blair DeMarco-Wettlaufer, the Chief of Operations Officer of Kingston Data & Credit, explained the process, “Ideally, we reach out to the person, and they pay. If they don’t pay, a collection agent’s biggest leverage is reporting debts to the credit bureau. We don’t want to do that on day one. That’s not legal. We don’t even want to do it on day seven. We want to give the person a chance to connect with us and work with us. And we tell them if you take care of this, we won’t report this to the bureau and then everybody wins.”
Concerns
The idea of receiving good credit for paying rent on time could help renters, however we have concerns about how this would work.
As noted earlier, providing information to the credit bureaus requires both time and technical expertise. Who is going to enforce landlords’ reporting to the credit bureau? How are mom-and-pop landlords going to handle this extra task? Will they end up having to hire help, and if so, how much will that cost them? Will we see the entrance of a new, fee-for-service, intermediary. Who will pay that cost? Will tenants see a rent increase to offset the extra costs?
We also wonder if this could lead to unfair practices by landlords who may take advantage of the situation for their benefit. As Blair mentioned, reporting to the credit bureau is a useful collection tool. It’s a pretty forceful hammer. Coud unscrupulous landlords use this tactic to by offering to give you a good credit score on your credit report in response for a payment penalty or rental increase. How will The Landlord and Tenant Board handle disputes if this gets out of hand?
The question also remains: how this will work for student or shared housing?If five people live under one roof, who will receive the credit? How does it work for couples who pay rent but only one name is on the lease?
Also, a credit score is a proprietary calculation made by each credit bureau. It will be up to each credit bureau to determine how much value rent payments have on your credit score. For example, currently, major cell phone carriers report to the credit bureau. If you pay on time, that reporting doesn’t help your score that much, but if you don’t pay on time, it can hurt your score a lot! If this is the way they plan to handle rent reporting, it could do more harm than good for some Canadians who are struggling.
At the end of the day how many people is this going to help vs potentially harm? If the government’s goal is to help young Canadians purchase their first home, I don’t think having rent reported on a credit report will help very much. A bad or no credit score is not what is stopping people from getting a mortgage. The real issue that is being faced is high home prices due to inflation which makes it hard to save for a down payment.
Using rent to establish a credit history might help people borrow other debt. For example, insolvent debtors (who are primarily renters) might be able to use their rent to rebuild their credit rather than take on new debt. However, again, it will all depend on the weight credit bureaus and prospective lenders put on rental payments vs payment history on actual credit like credit cards and bank loans.
While the concept of incorporating rent payments into credit scores holds promise, its impact may be limited in addressing the broader challenge of housing affordability and credit building. The pressing issue of soaring home prices due to inflation remains a significant barrier for aspiring homeowners, overshadowing the potential benefits of rent reporting on credit scores.
It’s great that the government wants to help young Canadians buy homes but a more comprehensive approach addressing the root causes of housing unaffordability may be necessary for meaningful change.
