Update 22 March: Hoorah! Since writing the blog, Experian contacted us to say it’d read it and seen your responses and has now changed its mind about the ‘financial linking’ element. See Experian u-turn for the full details. It is also going to think more about how to protect the ‘joint and severally liable’ if their flatmate defaults.
Credit reference agency Experian’s announced that by the end of 2012, your rental payment record could be added to credit files (see the Experian to monitor rents news story), so missed payments could kibosh mortgage and other applications.
This has pros and cons, but my strong objection is it means you risk being financially linked to anyone you live with, so their problems or missed card payments can hit you.
That seems a complete misunderstanding of who and how many flat shares work. Currently you can, of course, be credit linked if you get a mortgage with someone. That seems fair, it’s a major financial commitment usually with a spouse, close relative or close friend. However, with flat shares, it may be a cursory acquaintance, or very commonly someone you simply don’t know.
This new credit file regime (see the Credit Rating guide for the basics) could mean when you move in with someone, you’re going to have to commit to at least financially getting into bed with them – and that’s unacceptable. It’s not all bad, though. There are some plus points, but in my view it needs big work to limit the risks. Let me run you through it…
Any change will need to be contractual.
Landlords will only be able to report payments if you sign a contract allowing it. You have a right to refuse, but equally, they can simply refuse to rent to you. It’ll likely be big agencies that start doing this – the advantage for them is they can track who has a good rental record when they sign tenants up.
Paying rent on time could help your credit situation.
On the plus side, one letting agency says 90% of people pay their rent on time and doing so should help build their credit file. There’s also the fact that for flat sharers, they can assume their landlord may be doing a check that any new flatmate has a reasonable history of paying rent on time.
Of course, for those with a bad history this could become a nightmare, already people are prevented from getting new mortgages due to a history that lasts six years – so I’m guessing tenancy rejections could follow the same path.
Someone else’s missed rent could scupper you getting a mortgage.
Many tenancy agreements mean you’re ‘jointly and severally liable’ thus if one of you can’t pay, the other is liable for it. While this makes life easy for landlords, I’m not sure most flat share tenants are aware of the risk they’re taking, until someone doesn’t pay. And even if you are aware of the risks, the ‘flat share audition’ process isn’t good enough to weed out bad payers.
In the past, if someone in the house didn’t pay, that was an immediate financial problem. Now it will be a long term one. As if you or anyone you live with misses a payment it could negatively hit your credit score on applications for borrowing, mobile phone contracts and pay monthly car insurance.
The biggest worry is for those who are renting while they save for a mortgage. While there’s no info yet, it seems sensible to assume lenders will take your rental record as a substantial indicator in their credit scoring to determine if they should lend.
It’s not just rent, financial linkage to flat mates means if they don’t pay credit cards, you could be hit.
Currently, the only way to be financially linked is a joint bank account or mortgage – which makes sense. It’s one reason we suggest if your partner has a poor history don’t get any joint products with them (even marriage doesn’t link you – just joint finances).
Experian has told us that sharing a flat will mean linkage can happen too. The result is when you are credit scored for a product, they can look at the files of anyone you are linked to.
So if you move in with someone you’ve never met, who has a poor history of missed bills or credit card payment, it could hit you – and kibosh applications.
The financial linking element of this, rams up against natural justice for me. Individuals have no real way to find this out (and do we want people snooping and credit checking their flatmates anyway?). I intend to write to regulators, MPs, and the credit reference agencies to see if we can stop this financial linkage before it happens.
Overall, the whole episode leaves a rather sour taste in the mouth. When explaining what goes on credit files, the usual explanation is the electoral role info, and court judgements against you and any credit agreements you have. Yet renting isn’t a credit agreement, nor are gas and electricity bills, which are also starting to creep in.
I worry that this is a private company, making its own decision to stretch the net, who is policing that decision?
If I’m honest I’m still working through the thought process and logic of this myself, so these are initial thoughts, and I’d love your views.