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How to Build Credit

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How to Build Credit

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How to Establish Credit

Building credit can be tricky. If you don’t have a credit history, it’s hard to get a loan, a credit card or even an apartment.

But how are you supposed to show a history of responsible repayment if no one will give you credit in the first place?

To have a FICO score, for example, you need at least one account that’s been open six months or longer, and you need at least one creditor reporting your activity to the credit bureaus in the last six months. (A VantageScore, from FICO’s biggest competitor, can be generated more quickly.)

Several tools can help you establish a credit history: secured credit cards, a credit-builder loan, a co-signed credit card or loan, or authorized user status on another person’s credit card.

Whichever you choose, make sure you use it in a way that will eventually earn you a good credit score.

Five ways you can establish credit

1. Apply for a secured credit card

If you’re building your credit score from scratch, you’ll likely need to start with a secured credit card. A secured card is backed by a cash deposit you make upfront; the deposit amount is usually the same as your credit limit.

You’ll use the card like any other credit card: Buy things, make a payment on or before the due date, incur interest if you don’t pay your balance in full. Your cash deposit is used as collateral if you fail to make payments.

You’ll receive your deposit back when you close the account.

Secured credit cards aren’t meant to be used forever. The purpose of a secured card is to build your credit enough to qualify for an unsecured card — a card without a deposit and with better benefits. Choose a secured card with a low annual fee and make sure it reports to all three credit bureaus, Equifax, Experian and TransUnion.

NerdWallet regularly reviews and ranks secured credit card options.

2. Apply for a credit-builder loan

A credit-builder loan is exactly what it sounds like — its sole purpose is to help people build credit.

Typically, the money you borrow is held by the lender in an account and not released to you until the loan is repaid. It’s a forced savings program of sorts, and your payments are reported to credit bureaus. These loans are most often offered by credit unions or community banks; at least one lender offers them online.

3. Get a co-signer

It’s also possible to get a loan or an unsecured credit card using a co-signer. But be sure that you and the co-signer understand that the co-signer is on the hook for the full amount owed if you don’t pay. (See “What You Need to Know About Co-signing.”)

4. Become an authorized user on someone else’s credit card

A family member or significant other may be willing to add you as an authorized user on his or her card. As an authorized user, you’ll enjoy access to a credit card and you’ll build credit history, but you aren’t legally obligated to pay for your charges.

Ask the primary cardholder to find out whether the card issuer reports authorized user activity to the credit bureaus. That activity generally is reported, but you’ll want to make sure — otherwise your credit-building efforts may be wasted.

You should come to an agreement on how you’ll use the card before you’re added as an authorized user. If the primary cardholder expects you to pay your share, make sure you do so even though you aren’t legally obligated.

5. Get credit for the rent you pay

Rent-reporting services such as Rental Kharma and RentTrack take a bill you are already paying and put it on your credit report, helping to build a positive history of on-time payments. Not every credit score takes these payments into account, but some do, and that may be enough to get a loan or credit card that firmly establishes your credit history for all lenders.

Build your score with good habits

Building a good credit score takes time, probably at least six months of on-time payments.

Practice these good credit habits to build your score and show that you’re creditworthy:

  1. Make 100% of your payments on time, not only with credit accounts but also with other accounts, such as utility bills. Bills that go unpaid may be sold to a collection agency, which will seriously hurt your credit.
  2. Keep your credit utilization low — utilization is your balance when compared to your limit. We recommend paying in full each month, but if do you carry a balance don’t let it exceed 30% of your credit limit.
  3. Avoid opening too many new accounts at once; new accounts lower your average account age, which makes up part of your credit score.
  4. Keep accounts open for as long as possible. Unless one of your unused cards has an annual fee, you should keep them all open and active for the sake of your length of payment history and credit utilization.
  5. Check each of your credit reports annually for errors and discrepancies.

Learn how to check your credit scores and reports

A credit report is a record of how you’ve used credit in the past. Your credit scores estimate how you’ll handle credit in the future, using the information in your credit reports. You’ll want to monitor both to watch for errors and to see your credit-building efforts pay off.

Several personal finance websites, including NerdWallet, offer a free credit score. Look for a site that also offers free credit report information, as well as educational tools such as a credit score simulator.

Several credit card issuers print FICO scores on customers’ monthly statements and allow online access as well. Some go beyond that and offer free scores to anyone, cardholder or not: Discover offers a free FICO score at CreditScorecard.com, while Capital One offers a free VantageScore at its CreditWise website.

Updated Oct. 28, 2016. 

Erin El Issa is a staff writer at NerdWallet, a personal finance website. Email: erin@nerdwallet.com. Twitter: @Erin_Lindsay17Bev O’Shea is a staff writer at NerdWallet, a personal finance website. Email: boshea@nerdwallet.com. Twitter: @BeverlyOShea.

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How Long Until a Late Payment Hits My Credit Report?

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How Long Until a Late Payment Hits My Credit Report?

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How Long Until a Late Payment Hits My Credit Report?

Lots of people worry that an overlooked bill means a late payment will be reported to a credit bureau and ruin their credit score.

But simple forgetfulness is unlikely to tank your score — even when you’re a little late.

Late fees versus overdue payments

Just because your wallet got hit with a late fee doesn’t mean your credit report got hit with a negative mark.

Theoretically, you can incur a late fee for being even 30 minutes late with a payment. Many creditors automatically impose a fee when your due date passes without a payment posted to your account. But if you’ve never or rarely been late before, your chances of getting a credit card issuer to reverse a late fee are pretty good.

You don’t have to worry about a creditor reporting a payment that was a few days late, however. Credit bureaus don’t consider a payment late until it is 30 days past due. So while your mortgage holder or credit card issuer may charge you extra for paying three weeks after the due date, your credit score should be none the worse for it.

When does a late payment get reported?

The gold standard for reporting late payments to credit bureaus comes from the Credit Reporting Resource Guide, a standardized way for creditors to comply with federal law. Your payment can’t be reported late until it’s at least 30 days past due. You may be getting letters and phone calls about that overdue payment, but as far as the credit bureaus and your credit scores are concerned, the account is “current and in good standing.”

Knowingly and intentionally reporting you late when the bill is not at least 30 days past its due date violates federal law.

That said, late is not an all-or-nothing issue. Thirty days late is bad, but it’s not as bad as 60, which is not as bad as 90. The sooner you can catch up, the less damage to your credit and the sooner your score can start to recover.

How not to be late in the first place

Being a few hours or days late is not a crime. But if it happens a lot, those late fees will add up. Some strategies to help you avoid them:

  • Select payment due dates that are either at the same time, if that works for you, or staggered, such as on the first and 15th of the month. Many credit card issuers allow you to select your due date.
  • Set up text alerts that remind you about bills due in a few days. If you need more than one, set up multiple electronic nudges.
  • Consider using automatic payments, but be sure to have enough money in your account so you don’t get hit with overdraft fees. Auto-pay works well with bills that are the same every month, like your car payment. It may not work so well with ones that can vary tremendously, like your credit card bill the month the refrigerator died and your car needed a new transmission days after you returned home from vacation.  

Next steps

Paying on time is a worthy goal, but obsessing over a bill you overlooked and paid a little late isn’t. To maintain a good credit score, your best bet is to establish good habits:

  • Pay your bills on time, and in full if you can.
  • Keep your credit card balances low — below 30% of your credit limit, and lower is better.
  • Monitor your credit reports to watch for mistakes. You can get free credit report information two ways: Some personal finance websites, such as NerdWallet, offer report information on demand, and once a year you can get a report directly from each of the three credit reporting bureaus. 

Do those things and your credit score will take care of itself.

Bev O’Shea is a staff writer at NerdWallet, a personal finance website. Email: boshea@nerdwallet.com. Twitter: @BeverlyOShea.

Updated Sept. 7, 2016.

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How Is My Credit Utilization Ratio Calculated?

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How Is My Credit Utilization Ratio Calculated?

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With so many websites offering free financial tools, it can be hard to know whom to trust. At NerdWallet, we spend literally 1,000s of hours researching partner offers and following strict editorial integrity to match you with the perfect choice. We even share how we make money so you can enjoy our expert advice and researched recommendations with total clarity and confidence.
How Is My Credit Utilization Ratio Calculated?

Your credit utilization ratio is a measure of how much you owe on your credit cards compared with the cards’ limits.

This number matters a lot. Both FICO (the credit score used in most lending decisions) and VantageScore (its main competitor) heavily weight credit utilization while calculating scores.


Keeping your credit utilization ratio as low as you can is smart.

Charging too much on your cards (especially if you max them out) is associated with being a higher credit risk. That’s why running up your cards will lower your score. A low credit score will make it harder for you to qualify for the best rates on loans, insurance policies and other financial products.

Calculate your credit utilization ratio

Credit scores look at credit utilization in two ways:

Per-card utilization (also called line-item utilization): This measures how much of each card’s credit limit you’re using.

Overall utilization (also called aggregate utilization): This takes all your cards and their limits into account.

Enter the balance and credit limit for up to three cards in this calculator to see your per-card and overall utilization figures:

Per-card vs. overall — which is more important?

So which is more important: your per-card or overall utilization ratio? Trick question: Both are important. Credit scores can take the ratio into account in both ways — for each card and overall.

Why that’s important to know: If you try to counteract the negative effects of a maxed-out credit card by opening a new card and keeping its balance at $0, the high utilization ratio on the maxed-out card still may hurt your score.

Most experts say you shouldn’t use more than 30% of your credit limit on any one card. That way, the overall usage takes care of itself.

Tips for taming your credit utilization

Here are tips to keep your credit utilization under control:

  • Log in to your credit card accounts online and check your balances at least once a week.
  • Set up balance alerts to get a text or email when your balance creeps up near the 30% threshold (or set a lower bar if you like).
  • Make several small payments during the month rather than letting charges build up and sending one big payment on the due date. If you get paid more than once a month, use each paycheck as a reminder to make those smaller payments.
  • Consider asking your card issuer to bump up your credit limit, but only if it won’t tempt you to overspend and you think that your credit score is good enough to qualify. Jumping to a higher limit will instantly lower your utilization ratio.

Updated Oct. 24, 2016. 

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What’s the Difference Between a Soft Inquiry and a Hard Inquiry on My Credit Report?

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What’s the Difference Between a Soft Inquiry and a Hard Inquiry on My Credit Report?

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With so many websites offering free financial tools, it can be hard to know whom to trust. At NerdWallet, we spend literally 1,000s of hours researching partner offers and following strict editorial integrity to match you with the perfect choice. We even share how we make money so you can enjoy our expert advice and researched recommendations with total clarity and confidence.
What's the Difference Between a Soft Inquiry and a Hard Inquiry on My Credit Report?

When a potential creditor checks into your credit, it’s called “pulling your credit.” But two different types of credit checks can be performed: a “soft inquiry” or a “hard inquiry.” The Fair Credit Reporting Act places restrictions on exactly when and why credit reports may be pulled.

The primary hallmark of a soft inquiry or soft pull is that it does not adversely affect your credit score; a hard inquiry will.


Soft inquiry or ‘soft pull’

Soft inquiries often occur without you even knowing about them. If you’ve ever received a credit card offer in the mail, it’s likely that the credit card company did a soft inquiry to see if you would even qualify for the card. After all, it doesn’t want to waste the postage on someone who doesn’t qualify. The same goes for other types of loan offers, or when a mortgage broker or lender does a preapproval.

Employers also may do a background check on you. Employers often feel more comfortable hiring someone with good credit, as they think it indicates a responsible individual.

Most importantly, checking your own credit is a soft inquiry, so never be afraid to check your credit over concerns that it may hurt your score. You can get your free credit report either on demand from a personal finance website like NerdWallet or once a year directly from the three major credit-reporting agencies.

Hard inquiry or ‘hard pull’

Hard inquiries do affect your credit score. You will likely know about them — or rather, you had better know about them — because your consent is required. A hard inquiry is triggered when you actually apply for credit, such as a mortgage, credit card, auto loan, student loan, personal loan or business loan.

This inquiry becomes part of your credit report, meaning anyone else who does a hard or soft pull will see the inquiry. A hard inquiry may shave up to 5 points off your FICO score. However, when you are “rate shopping” (such as for mortgage, student and auto loans), all inquiries within a 45-day period are considered one inquiry. VantageScore, FICO’s competitor, also has shopping windows that count as a single inquiry, though they are generally shorter. A spokesman said a hard inquiry can shave 10 to 20 points off a VantageScore.

You want to be careful not to hit your credit report with too many hard inquiries. Consider whether those bonuses you are hoping to receive by getting that credit card are worth the ding to your credit score. If you have outstanding credit, a few points may not be a big deal. However, if you have borderline credit quality, think twice.

Hard or soft?

Some inquiries could be either soft or hard. If you rent a car, apply to rent an apartment, sign up for cable TV or Internet service, open an account at a financial institution, or someone just needs to verify your identity, you may get hit with either a hard inquiry or a soft inquiry. The only way to know is to ask the potential creditor, and maybe even check in with one of the credit bureaus.

Updated March 16, 2017.  

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How Do Secured Credit Cards Work?

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How Do Secured Credit Cards Work?

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With so many websites offering free financial tools, it can be hard to know whom to trust. At NerdWallet, we spend literally 1,000s of hours researching partner offers and following strict editorial integrity to match you with the perfect choice. We even share how we make money so you can enjoy our expert advice and researched recommendations with total clarity and confidence.
How Do Secured Credit Cards Work?

If you have bad credit, a secured credit card can be a great way to improve your credit. Secured cards work the way regular credit cards do: You charge purchases to your account, make monthly payments and pay interest on balances you carry from one month to the next.

» MORE: See your credit score for free with NerdWallet

But there’s one major difference. You have to make a deposit to receive a secured card. This deposit protects the card issuer in case you don’t make your payments — and makes it easier for people with poor credit or a short credit history to get approved.

How the security deposit works

When you rent an apartment, you give the landlord a security deposit, which he or she can use to pay for repairs of any damage you might leave behind. Deposits on secured credit cards are similar: You provide a certain amount of money as collateral, and the credit card issuer usually gives you a credit limit equal to your deposit. For example, if you make a $500 deposit, your credit limit will also be $500.

When your lease is up, if your apartment is still in good shape, your landlord will refund your security deposit. Likewise, if you make on-time payments on your secured credit card, you’ll get your deposit back when you close or upgrade your account.

Find the right card

If you’re getting a credit card to remedy your bad credit, choose one that reports to all three credit bureaus. Not all cards do. If your card issuer doesn’t report, you won’t improve your credit, no matter how faithfully you make your payments.

» MORE: NerdWallet’s best secured credit cards

The application process

Even though you’ll put down a security deposit, you won’t automatically be approved for a secured card. You still have to apply, and most of the time, the issuer will check your credit. Each credit check resulting from a credit application lowers your credit score a bit, so it’s not a good idea to apply for too many cards. If you’ve been rejected by a few issuers, explore other options. If you have a very low score, you may want to look for a card that doesn’t require a credit check at all — and there are a few.

» MORE: I was denied a secured credit card. What do I do?

Use your card the smart way

To improve bad credit, always make payments to your secured card on time and use only a small percentage of the credit extended to you. Don’t assume that your credit card company will use your deposit to cover any of your payments — secured cards aren’t the same thing as prepaid debit cards. Skip a payment, and you’ll end up with late fees and a negative on your credit report.

Level up

After your credit has improved, you may want to close your secured credit card and switch to an unsecured card — one with a higher limit that doesn’t require a deposit. If you’re thinking of doing this, call your credit card company and ask if it will upgrade you to an unsecured card. If you have a good payment history, the answer may well be “yes.”

If you choose to close your secured card, call your credit card issuer to request that it close your account and refund your security deposit.

This article has been updated. It was originally published Dec. 12, 2014.

Lindsay Konsko and Virginia C. McGuire are staff writers at NerdWallet, a personal finance website. Email: lindsay@nerdwallet.com and virginia@nerdwallet.com. Twitter: @lkonsko and @vcmcguire


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What Is a Credit-Builder Loan?

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What Is a Credit-Builder Loan?

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With so many websites offering free financial tools, it can be hard to know whom to trust. At NerdWallet, we spend literally 1,000s of hours researching partner offers and following strict editorial integrity to match you with the perfect choice. We even share how we make money so you can enjoy our expert advice and researched recommendations with total clarity and confidence.
What Is a Credit-builder Loan?

Credit-builder loans can help you build your credit score, and they don’t require good credit to start with.

They’re not widely advertised and are generally offered by smaller financial institutions, such as credit unions and community banks. The purpose, as their name suggests, is to help people achieve credit respectability.


Financial institutions would like to see you succeed. After all, if you become a customer, you’re more likely to make money for them in the future. To make sure it doesn’t get burned on the loan, the lender will set strict limitations. Think of it as training wheels for credit.

Credit-builder loans go by many names, such as the catchy “Fresh Start Loans” or “Starting Over Loans.” If you’re looking to restore your credit with an installment loan, ask your bank or credit union about secured personal loans designed to help people who need to help build credit.

Secured credit cards have long been suggested as a means of credit building — and they can be very effective — but you first have to have enough money to pay the security deposit.

If you have an income but can’t pay a deposit for a secured credit card, credit-builder loans offer a way around that hurdle.

How credit-builder loans work

You apply for the loan, whether you have bad credit or no credit, and you are approved, but there’s a safety net for the lender. The money you borrow is deposited in a savings account — one that you cannot access until you have fully repaid the loan.

If you pay the loan as agreed, the financial institution promises to send a good report to the credit bureaus. A 2013 study showed an average improvement of 35 points with six months of on-time payments for loans as small as $100.

At the end of the loan term, you get the money — and likely a better credit score.

But be sure to pay on time. If you miss payments, that negative information would also be reported. The financial institution doesn’t take a big risk when it lends to you, because it can reclaim the money if you don’t hold up your end of the bargain.

If you’re looking for a credit builder loan and your credit union or community bank doesn’t offer them (or even know what they are), you might try a Community Development Financial Institution. These organizations exist to help lower-income communities, and there are about 1,000 of them in the United States. Government grants and other incentives make these small-dollar loans more attractive to financial institutions.

Online lenders include Self Lender, which offers $1,100 loans repaid over a year at $100 a month. At the end, you get $1,100 and a credit score with a year of on-time payments.

How secured installment loans work

You don’t have to be low-income to have crummy credit or a need to improve. If you have money in the bank, you may have another option for an installment loan: a share- or certificate-backed loan.

In that case, a deposit you already have at the financial institution is the collateral, and that money is frozen until the loan is repaid (or it may be incrementally thawed, as the loan is repaid). So if you have funds on deposit at a small bank or credit union, it may be worth asking if you can borrow against them to help re-establish your standing. Other lenders may allow you to borrow against the value of your car.

You may have other options for building credit

Secured loans such as credit-builder loans tend to be a good deal because the collateral reduces risk for the lender and greatly reduces the interest rate, which is typically well under 10%. The catch, of course, is that you don’t get the money until the loan is repaid.

If you are trying to build credit and need the proceeds of a loan immediately (for debt consolidation, for example), you will probably need to take an unsecured personal loan. That means the lender has no collateral, just the strength of your credit history, to rely on. If your credit is damaged or thin, you’ll pay higher interest rates, sometimes as much as 36%, which tends to be the ceiling with most lenders.

Some lenders who will grant you unsecured personal loans without checking your credit at all, but those installment loans are much more like payday loans. The lenders don’t check your credit, but they also don’t report to credit bureaus unless you default. And the loans carry interest rates that can easily reach 300% or higher.

Bev O’Shea is a staff writer at NerdWallet, a personal finance website. Email:boshea@nerdwallet.com. Twitter: @BeverlyOShea.


Image via iStock.

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How Paying Rent Can Affect Your Credit

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How Paying Rent Can Affect Your Credit

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How Paying Rent Can Affect Your Credit

A lot of people who don’t have much in the way of a credit history do have a history of paying rent on time. If that information showed up on their credit reports, it might help their credit scores.

You can’t report rent payments yourself. But rent-reporting services can get your credit reports to reflect your rent payments fairly easily, at a cost that ranges from free to more than $100 a year.



But here’s the catch: There are many different credit scores calculated from the information on your credit reports, and most credit card issuers and lenders don’t use the scores that consider rent payments. When you apply for credit, you don’t generally know which score the lender is going to pull when it checks your credit, or which credit bureau’s report it will use.

To use a rent-reporting service effectively, you’ll need to know which credit bureaus it will report your payments to — and which credit scores take those payments into account.

Which credit scores consider rent payments?

Rent payments remain rarely reported. A FICO spokesperson estimated that less than 1% of credit files contain rental entries. But all three major credit bureaus — Experian, Equifax and TransUnion — do include rent payment information in credit reports if they receive it.

Although rent is reported as a “tradeline” on credit reports — much like a mortgage or car loan would be — it’s not treated the same for credit scoring purposes, says consumer credit expert Barry Paperno, who blogs at Speaking of Credit. The most commonly used versions of the FICO score don’t use rental payment information in calculating scores, but FICO 9 and FICO XD do, as does VantageScore.

Some renters use the reporting services to get credit with lenders that are known to use those scores. At least one rental reporting company tells its customers which credit cards to target. If you’re not sure, browse among the best credit cards for bad credit or the best student cards.

Once you have a card, using it lightly and paying on time will build credit because all credit scoring formulas take credit card payments into account.

How does rent reporting compare with other types of credit building?

Other credit-building strategies rely on more traditional tradelines. You can get a secured credit card, for example, or a credit-builder loan. Revolving debt, such as credit cards, and installment loans are considered in virtually every credit score.

“Rent information will help lenders that are prospecting for possibly creditworthy people who have been overlooked,” NerdWallet columnist Liz Weston says. “But most lenders are still focused on attracting people with good traditional credit scores. If you want the best rates and terms, you have to build credit the old-fashioned way — with credit accounts.”

Still, it is possible for you to be approved for a loan without a FICO score — even a loan as large as a mortgage — but you will likely be working with a small lender.

And having rental payment information in your credit report can be useful if you rent again. Landlords prefer tenants who can show a history of paying on time. A study by the nonprofit Credit Builders Alliance showed that rent reporting led to more on-time rent payments and higher Vantage 3.0 credit scores for participants.

Which services will report your rent payments to lenders?

There are several ways to get records of your payments in front of lenders. Among them:

Rent Reporters: There is a one-time enrollment fee of $59.95, which includes up to two years of reported rental payments, then the service is $9.95 per month. It reports to TransUnion.

Rental Kharma: Initial setup is $40, and then the service is $9.95 per month. During enrollment, you can report payments made in the previous 24 months for a fee of $5 per month reported. It reports to TransUnion.

RentTrack: The service costs $2.95 a month (although some landlords pay the fee and offer the service free to tenants). It reports to all three credit bureaus. A look-back of up to 24 months is available on your current lease.

ClearNow: This service debits your rent from your checking or savings account. There’s no cost to tenants, and, if you opt in, payments are reported to Experian.

PayYourRent: Variable fees, depending on how rent is paid; in some cases the fees are paid by management. It reports to TransUnion and Experian on an opt-in basis.

ERentPayment: Tenants may sign up for this rental payment service only if the landlord is registered. There is a $3 transaction fee for processing electronic rent payments; the landlord may split that cost or require that the tenant pay it. Reports to all three credit bureaus. Two years of previous payments may be reported to Equifax and TransUnion, but not Experian.

Note that your landlord may need to verify your rent payments. Some services may not be able to report your payments if your landlord won’t verify.

What questions should you ask a rent-reporting service?

If you’re shopping for a way to have rent reported on your credit report, here are questions you should ask service providers. Also, check to see if your property manager already works with a service.

  • What would my total costs be for a year of service, including any setup fees or fees for reporting previous rental history? (Some services can go back as far as 24 months.)
  • How do you protect my personal data?
  • Which of the major credit bureaus do you report to? (All three is ideal.)
  • Do you provide free access to credit scores, and if so, which score(s)? (Note that you can sign up with NerdWallet for a free Vantage 3.0 score, updated weekly.)
  • How soon should I expect the information to appear on my credit report?
  • How can I cancel the service?
  • What happens if I have a dispute with my landlord? In some states, renters have a right to withhold payment if the landlord fails to keep the unit repaired and habitable. Critics have expressed concern that consumers might be afraid to exercise tenant rights for fear of being reported late to the credit bureaus.

Bev O’Shea is a staff writer at NerdWallet, a personal finance website. Email: boshea@nerdwallet.com. Twitter: @BeverlyOShea.

This article was updated Feb. 13, 2017.