This pilot program helps people improve their credit scores just by paying their rent on time

If renters make late payments, their landlord might charge a penalty fee and report that late payment to credit bureaus, hurting their credit score. And unlike mortgage payments, paying rent on time doesn’t automatically build credit. For low-income Americans—only half of whom have access to a credit card, and who are more likely to rent than own—that means it can be a hurdle to build credit.

But, for the past few months, residents living in certain affordable housing units across the country have been able to raise their credit scores just by paying their rent on time. The initiative is a partnership between Kairos Investment Management Company, a private equity firm focused on real estate investments, and Esusu, a fintech company that builds tools to allow renters to report their payments to the three major credit bureaus.

Kairos offered the credit-building tool to 19 of its affordable housing communities, which covers about 4,000 units across seven states, including Florida, Texas, and Oregon. It allows landlords to report timely payments to credit bureaus, rather than only reporting late ones. Esusu worked with Freddie Mac to help cover some of the sign-up costs for landlords. (Sign-up costs for landlords can vary; for some it’s $2 a month, for others $50 a year; Freddie Mac has helped cover some costs in other partnerships, as well.) If a renter is late on a payment, Esusu unenrolls them rather than sending that information to credit bureaus; Kairos says pre-pandemic, 99% of its rent was collected on a regular monthly basis; it’s dropped to 97% during the pandemic but is expected to improve.

“It’s an interesting way to approach the problem, in that they’re positively reporting rent payments on tenants’ credit to build credit, where normally landlords only report if there’s a negative result,” says Jonathan Needell, president and chief investment officer at Kairos.

Esusu also tracks improvement in credit. In its first report for Kairos, Needell says that 46% of the residents who signed up to be in the rent-reporting program improved their credit score by at least one point. The highest improvement was 168 points. There’s only been one report looking at one month of the program, so while data is relatively scarce, other partnerships with Esusu have found that a majority of residents enrolled in a rent-reporting program saw their credit scores increase by an average of 32 points, and that these programs helped thousands of renters who didn’t have credit scores at all to establish their “financial identities.” For people with poor credit—which often means paying more fees to borrow money and higher insurance premiums—low scores often mean remaining in a cycle of poverty, even when they begin to earn higher wages.

Renters have been in particularly precarious financial situations lately, amid pandemic job losses, the end of pandemic-era rent relief programs and eviction protections, and with rents hitting all-time highs across the country. As of September 2021, around 10.7 million renters remained behind on their rent. But financial struggles among renters existed before the pandemic, when renters had credit scores between 87 and 106 points lower than homeowners.

Esusu also offers a rent relief initiative, for which renters can apply for interest-free loans to help cover the cost of rent for up to two months. So far, Esusu has distributed loans of about $7,000 or six of Kairos’s tenants in the first two months of offering that opportunity. The average length of that loan was only four weeks. “When people are behind, they’re just a little behind,” Needell said. Many people in affordable or regulated housing are service workers in hourly wage jobs, so if they miss work because they’re sick, “they’re down a week of pay and they just need to catch up. So it’s not surprising that a small loan can go a long way to helping them.”

Kairos offers other social programs, too, like free flu shots, a free lunch program for children in the summer, and free tax prep services. Kairos has also run programs with nonprofits to provide backpacks and school supplies around back-to-school season. Needell concedes that these benefits ultimately help the management company, too—tenants may have issues paying rent around the beginning of the school year because they prioritize getting necessary items for their kids—but they can also help ease renters’ financial burden.

The credit-building program with Esusu could help these tenants even when they no longer live in these units. “These are people that when they go to their next unit at their next property may benefit from having a better credit and getting into a better property. They also might get a better credit card rate because their credit score is higher. They might actually qualify for a mortgage for the first home quicker because they have better credit,” Needell says. Lower-income tenants tend to have to give deposits for utilities, too, though that can be dropped, depending on the area and the company, if someone has good credit. “There’s lots of benefits to having that better credit.”