It's hard to get credit if you don't have it already. But now there's another way to persuade lenders to give you a good rate on a home mortgage or auto loan. Pay Rent, Build Credit Inc. (PRBC) tracks how well participants pay their expenses - everything from rent and utilities to day care and insurance. It's free for individuals to sign up, and once there's a critical mass of data, lenders will be able to use the scores in addition to, or instead of, traditional credit scores.
"It's a profound change that people can show their creditworthiness without going into debt," says PRBC founder Michael Nathans. He estimates that 50 million people in the United States have no or low FICO scores (a standard credit-history screening tool). Among them are immigrants, college students, and anyone who uses cash instead of credit cards. But many of these consumers pay their rent on time - something considered highly predictive for successful mortgage payments, Mr. Nathans says.
"It has enormous potential in terms of helping to fix the mortgage-lending industry," adds George McCarthy, a program officer at the Ford Foundation in New York, which gave a start-up grant to the for-profit PRBC because it will largely serve low-income households. "It's kind of tragic that the largest single payment that most nonhomeowners make each month is not even counted toward establishing their credit."
Currently, it's not impossible for consumers who lack a credit record to get mortgages, but it depends on whether the lender is willing to do the legwork to verify these kinds of payments. PRBC's electronic database "will make it more efficient to underwrite [these loans] and will make more borrowers eligible for owning a home," says Jeffrey Polkinghorne, chief credit officer of Citimortgage in St. Louis. Citimortgage and Fannie Mae are the first lenders to invest in the development of the system.
Landlords can sign up to automatically record people's payments and, in turn, can check the payment scores of potential renters. That will provide an important counterweight to the credit-reporting system, which has some biases, says Mr. McCarthy: "Lots of large landlords are signed up with the credit agencies, and very often they only report people who pay their rent late - they don't report timely payments."
Positioning itself as a socially responsible consumer reporting agency, PRBC will partner with community development agencies and will give people positive marks for taking approved courses on financial literacy and home maintenance. But the system is not designed solely for those with problematic credit histories. "Lenders are fighting over the good customers," Nathans says, so borrowers with strong credit scores might get better rates from lenders by showing that they also pay rent and other bills on time.
Revenue will come from lenders who want access to the information (and nonprofit lenders will pay a lower rate).
Nathans won't reveal how many people have signed up for the service, but he says they come from 45 states and have found the website (www.payrentbuildcredit.com) largely through word of mouth. Mr. Polkinghorne expects that Citimortgage will be able to start using the system next year if at least 200,000 people are in the database.
If PRBC succeeds, it will bring a new level of efficiency to a process that is already starting to offer more fairness to borrowers, advocates say. Fannie Mae and Freddie Mac, government-sponsored entities and the largest source of mortgage funds in the US, have stopped using credit scores as a screening tool, McCarthy says.