Do late rent payments affect a tenant’s credit score?
Historically, rent didn’t contribute to a tenant’s credit score. That changed about a decade ago and “rent reporting” has been shaping US credit reports ever since.
If a tenant fails to pay their rent on time, it can impact their credit score, but only if:
- The payment is delinquent for more than 30 days, and
- it is reported to a credit agency.
How you respond to delinquent payments as a landlord will not only impact the tenant’s credit score, but it will also shape the relationship that you have with the tenant and impact future payments/delinquencies.
What happens if a tenant misses a rent payment?
If your tenant has missed a rent payment, you must decide what—if any—steps to take.
Although not legally required in most states, many tenancies contain a grace period of up to 5 days. If so, the rent is only late when this period has passed.
After confirming that the rent is delayed, the first thing you should do is send the tenant a late rent notice. The notice will remind the tenant that they are late with the rent and include information on any additional fees that they owe, along with a warning that you may take legal action if a payment is not made.
You can discuss payment plans with the tenant if their issues are temporary, but that’s entirely at your discretion. Just make sure that any agreement you make and receive is put into writing and signed by both parties.
- Establish a clear and open line of communication so the tenant has someone to discuss their payments with.
- Make it easier for the tenant to pay their rent (including more payment options, as provided by MRI RentPayment).
- Keep a record of all documents you send them and all communication you have with them.
- Don’t take a partial payment, as it may complicate legal proceedings further down the line.
Do late rent payments affect credit?
Credit scores are pieced together by credit reporting agencies like TransUnion, Experian, and Equifax. These agencies take the information they receive from credit providers, banks, and lenders, and use it to build a score highlighting an individual’s creditworthiness. That score usually increases when the individual pays bills and decreases when they miss payments, but that’s only true if the lenders/creditors report those payments and delinquencies.
As a landlord, if you don’t report a tenant’s missed rent payment, it won’t appear on their credit report, so it won’t impact their score.
Many smaller landlords don’t report to credit agencies as they don’t have the means to do so, but if you collect rent via an agency/software, they will often do the reporting for you.
And you should report. It might seem like you’re doing the tenant a favor by not reporting, but it benefits everyone. Reporting rent payments creates a detailed payment history that helps other landlords judge the tenant’s reliability. It also means the tenant’s positive payment habits reflect on their credit report while providing some accountability for delinquencies.
What are the impacts of late rent payments on credit?
If a late rent payment is reported, it will have a negative effect on an individual’s credit score. There is no fixed points loss, however, and the amount they lose will depend on everything from their current score and other negative marks to their payment history.
Payment history accounts for 35% of a total credit score, more than any other category (amount owned, new credit applications, length of credit, and credit variety). So, the loss will likely be greater than the one suffered by applying for new lines of credit or opening a new account.
Do on-time rent payments help to build your credit score?
A late payment is not the end of the world for a tenant. They can re-establish a relationship with the landlord and ensure that future payments are made in full and on time. In doing so, their payment history will gradually improve, taking their credit score with it.
It’s a long and slow process. A single on-time payment won’t offset the damage caused by a missed payment. But on-time payments should always be prioritized and they will leave their mark in time.
How should a landlord handle late rent payments?
Tenants have many reasons for missing payments. There may be a technical issue with their payment method. They may be experiencing cash flow problems due to medical expenses or a recent job loss. Assuming it’s the first time they have been late with their rent, you should communicate with them and find a solution.
If a solution cannot be found, you can consider eviction.
Some states allow you to move forward with eviction immediately after a missed rent payment, but others require a grace period of several days or even several weeks, so check your local laws and see where you stand.
There are two courses of action here: a “pay or quit” notice and an actual eviction notice.
Pay or quit notice
A “pay or quit” notice is usually the next step when communication/trust has broken down and you’re not confident that the tenant will meet their obligations.
It’s a literal warning to “pay your rent or leave the property”. State laws will determine how the notice must be served (via a sheriff, by mail, or posted on the door of the property), as well as the period of time that the tenant has to pay the rent.
An eviction notice
If the landlord is able to collect rent from the tenant, the process stops, and the agreement continues as before. If the deadline passes without payment, you can consider starting the eviction process.
Start by filing a tenant-landlord complaint in court, with the goal being to eventually evict the tenant. In some states, you can file an unconditional quit notice, which doesn’t give the tenant an option to pay the rent and stay. The legal process can take several months, and when that eviction eventually happens, you could be seriously out of pocket. It’s best, therefore, to give the tenant a chance to repay and thus avoid the expense and hassle of legal proceedings.
As with any legal process, you should consult with a legal professional before making any final decisions.
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Summary: Does late rent payment affect credit?
So, do late rent payments affect credit? Yes, but not always.
Missed/late rent payments will only appear on a tenant’s credit report if the delay is over 30 days and the landlord reports to credit agencies.
As a tenant, you should prioritize rent payments and strive to pay them in full and on time. Creating a positive payment history will help you avoid negative marks while showing future landlords and lenders that you’re reliable and trustworthy. It also allows you to build a good relationship with your landlord.
As a landlord, you should consider reporting a tenant’s activities while encouraging them to make on-time payments and acting when they do not:
- Use rent payment software like MRI RentPayment to simplify the rent collection process
- Communicate with the tenant if they are late
- Document everything; don’t accept partial payments
- Serve a “pay or quit” notice if the rent is still not paid
- Consider starting the eviction process
FAQs about late rent payments and credit scores
Does one late payment affect credit?
Yes, if it is reported then one late payment can impact an individual’s credit score.
Can landlords see missed payments?
Yes, landlords can check a prospective tenant’s credit report to look for missed payments, payment gaps, debt, delinquencies, and other information that will help them determine a prospective tenant’s creditworthiness.
Will two late payments ruin my credit?
It depends on how strong your credit report is in other areas. If you have recently applied for a lot of credit and have a high debt-to-credit ratio (the amount of total debt compared to total available credit) your score will drop much lower than someone who excels in these areas.
Severn Management Company Uses RentPayment to Improve Payments Experience
Learn about how Severn Management Company, a real estate development company based in Annapolis, M.D., uses RentPayment to reduce the time and workload of processing payments and improving the payments experience for residents.