'Rent credit cards': The next gateway to debt addiction?

Credit card companies have found a new way to get Americans hooked on credit—this time by targeting their biggest monthly expense.

As The Wall Street Journal reported, Wells Fargo and fintech startup Bilt Technologies launched a new credit card in 2022 that allows users to pay for rent without incurring landlord fees.

Like other credit cards, the program allows users to earn rewards every time they pay rent.

In the first 18 months, the program attracted more than 1 million users, many of whom were young adults. Thanks to the rapid growth, the fintech startup amassed a whopping $3.1 billion valuation.

Before Bilt Technologies came along, most landlords refused to let their tenants pay with a credit card because of the fees associated with it. Now, if they accept a Bilt co-branded credit card, they don’t incur any fees.

With billions of dollars flowing into Bilt, it seems reasonable that Americans will soon have more options for paying rent using a credit card. In addition to Wells Fargo, Bilt has deals with Blackstone and Mastercard—two of the largest credit companies in the world.

Experts warn this could be a slippery slope for highly indebted Americans who have nowhere else to turn.

Credit addiction meets rent: A dangerous combo

Americans have long been taught that their rent payments shouldn’t exceed 30% of their monthly income. Unfortunately, for many tenants, rapid inflation since the pandemic has made this threshold almost impossible to maintain.

According to CoreLogic, the average U.S. rent-to-income ratio is around 40%, making the current rental environment one of the least affordable in history.

CoreLogic also estimates that nearly 70% of renter households have a gross income that’s less than the U.S. average. That means many tenants are one emergency or unexpected expense away from falling into serious financial hardship.

It’s easy to see why someone in this situation would lean on their credit cards to pay for rent.

American consumers collectively owed $1.12 trillion in credit card debt in the first quarter. According to data from the New York Fed and U.S. Census Bureau, a typical household racks up nearly $8,000 in credit card debt each year.

Making matters worse, delinquency rates are surging, especially among lower-income borrowers who make up a large portion of the rental market.

“You have these noticeable pockets of consumers—mostly middle- and lower-income renters who have not benefitted from the wealth effect of higher housing prices and stock prices—who are feeling financial stress, and that’s driving up these delinquency levels,” said Warren Kornfeld, a senior vice president at Moody’s.

It’s for these reasons that experts warn that consumers shouldn’t be using any form of credit to pay for rent unless it’s an emergency.

“If you have no other way to keep a roof over your head, then using a card could buy you a few months to get back on your feet financially,” said John Ulzheimer, a financial expert who used to work at FICO and Equifax.