Running a credit check on a prospective tenant is a crucial step to consider in the tenant screening process, as it can be the difference between getting a good or a not-so-good tenant.
Use of a credit report can help a landlord gain a more holistic view of their prospective tenant’s financial behavior and condition. According to a TransUnion survey, renter payment problems ranked as the number one concern for 84% of landlords, which is no surprise when the average cost of eviction due to the nonpayment of rent is $3,500 and can take 3-4 weeks.
The information that is provided in a credit report could foreshadow the likelihood that your prospective tenant will pay rent on time. Unlike large apartment complexes who can absorb an eviction and still hit their bottom line, independent landlords, who own 1-4 properties, likely cannot afford an eviction, late paying renter or other bad rental outcome that results in an unforeseen tenant turnover.
That’s why it’s crucial to consider utilizing a credit report to help place the right tenant in your rental property from the start.
Let’s take a look at what you can learn from a credit report, tips on how to read it, and examine how this information may give you insights to help select a quality tenant for your rental property.
Why should I run a credit history check?
Running a credit check can allow landlords to dig deeper into an applicant’s financial history.
Checking a prospective tenant’s credit can give you the insights needed to make a well-informed leasing decision. If a prospective tenant has a good credit history and consistently makes their payments on time, then chances are they’ll pay rent on time. If their credit report shows choppy payment history, then this past behavior could reflect future behavior, and this may indicate that you need to do more investigating before signing a rental agreement.
What can I learn from a tenant credit check?
There’s plenty of knowledge to be gleaned from a prospective tenant’s credit check. Depending on the type of credit check you run, a credit report may provide information spanning back 7 to 10 years.
When reviewing an applicant’s credit report, you may discover the following:
- Identity Verification: Credit reports can help you verify a tenant’s identity by confirming their name, address, date of birth, and employer.
- Credit History: A credit report can provide insight into an applicant’s payment patterns. As mentioned earlier, landlords reported that payment problems as their number one concern about new tenants, so ensuring an applicant regularly makes payments on time is crucial. A credit report may also list bank accounts, show an applicant’s credit accounts, and disclose loan amounts that are under their name.
- Public Records: A credit report may shine light on any evictions, bankruptcies, tax liens or judgments against the prospective tenant, which could be indicators that they may not the right applicant for your rental property.
- ResidentScore: With a TransUnion SmartMove credit report, you receive a ResidentScore. This is a type of credit score that TransUnion developed specifically for the rental industry. ResidentScore uses over 100 different data points and is based on actual rental outcomes. It has shown efficacy to predict evictions 15% better than a typical credit score and assigns a score from 350-850, with 850 being the best score possible. A higher ResidentScore can indicate that the applicant is of higher-quality, while a lower score could indicate higher risk. Where the applicant’s score falls on the scale can help you better assess their risk.
What should I consider in a tenant credit check?
When you complete a tenant credit check, the information you receive may help guide your decision of whether to rent to an applicant.
As you examine a credit report, there are several red flags to consider:
- Late payments: First, consider how the applicant handles their payment responsibilities. Do they pay their bills late? If so, how late are the payments and how often do late payments occur?
Why it matters: According to CitiGroup, more than half of Americans have paid a bill late. While it’s reasonable to recognize human error, if their credit report shows a consistent pattern of late payments, then this could be an indicator that they will fail to pay rent on time or at all.
Significant amounts of debt: The likelihood of renting to a tenant with no debt is slim, especially in today’s economy. According to USA Today, here’s how much debt the average U.S. household owes in credit cards, auto loans, student loans and mortgages:
- Credit cards: $16.8K
- Auto loans: $29.5K
- Student loans: $50.6K
- Mortgages: $182.4K
While your applicant may have debt, a credit check can help you determine if they are responsibly handling their monthly payments.
To note: keep in mind that if your prospective tenant is carrying a great deal of debt, then the loss of a job or an unexpected illness could make it very difficult for them to handle their bills in the future.
Why it matters: If the monthly payments on their debt accounts are too high, then it could prove challenging for a prospective tenant to pay rent consistently each month. The last thing a landlord wants is for their renter to overburden with debt and be in a position to have to ask the question of “which payment is more important?”
Pro-tip: To help better assess your prospective tenant’s income, landlords can use Income Insights, a SmartMove tool that analyzes the applicant’s self-reported income by using data from the credit report, including an analysis of how much they pay toward balances, the amount of money they spend, and the types of balances they carry among other factors. Income Insights compares this credit behavior to the applicant’s self-reported income to determine whether additional income verification is recommended.
Another measure to determine an applicant’s ability to pay rent is based on some simple math. Calculating the rent-to-income ratio can help to provide a quick view about the applicant’s ability to afford the rent. What is a good ratio? Generally speaking, tenants who make three times income compared to rent is considered adequate, but you should of course decide for yourself. Note: this rule of thumb may vary by location.
- Public records: A credit report may show if your prospective tenant has any derogatory credit marks in his or her past, including collections, civil judgments, or bankruptcies.
Why it matters: If your prospective tenant has many collection accounts and judgments, then it may demonstrate that they’re not financially responsible – which could indicate they won’t be responsible with rental payments.
- Credit history: The way your tenant uses credit can be telling. Gaining insight into a tenant’s overall credit history can help you determine if they’re likely to pay their rent each month.
Why it matters: While a blemished history of credit (signaled by a bad credit score) doesn’t necessarily mean they’ll be a bad tenant, it may serve as a good indicator of a tenant’s ability to pay their rent in a timely manner. It may be worth it to look for a prospective tenant that has a healthy credit history.
Tips on how to run a credit check?
There are a variety of ways to run a credit check on a prospective tenant:
- Ask your applicant to provide their own credit report: Some landlords prefer to ask tenants to pull their own credit report. However, this may not garner the best results. Because tenants can generally only pull one free copy of their credit report annually, the information they provide may be outdated. Additionally, an applicant may technically be able to digitally alter their credit report and manipulate information contained within, which then gives you a false representation of who is really interested in your rental unit.
- Access reports directly from a credit bureau: Property management companies can use a prospective tenant’s application to pull a credit report directly from a credit reporting agency. However, independent landlords may not have this access or may need to go through a rigorous on-site inspection process in order to gain access.
- Use an FCRA-compliant online tenant screening service: One of the easiest and most efficient ways to view your tenant’s credit report is through an online tenant screening service like TransUnion SmartMove.
SmartMove empowers the applicant to share their data when they want, and with who they want in a secure way. It uses a credit “push” instead of “pull” method. With a credit push, the renter authorizes access to their own credit report, then “pushes” it to the landlord. In the case of SmartMove, this generally results in a soft inquiry on the applicant’s credit report which typically doesn’t impact the calculation of certain credit scores, such as ResidentScore.
ResidentScore was created specifically for the rental industry and is calculated using a sophisticated formula that analyzes a prospective tenant’s credit report. ResidentScore predicts eviction more often in comparison to a typical credit score in the bottom 20% score range where risk is greatest. Your applicant’s ResidentScore is calculated on a range of 350 to 850; where they fall on that scale can help you determine the risk of renting to them.
It’s easy to run a tenant credit check with SmartMove. Sign-up is free and the process is fast and done all online. All you need is your applicant’s email address and we’ll do the rest. Once you’ve provided their email information, we’ll send them your request for a credit check. With their approval, we can gather data from TransUnion’s robust databases and other sources to send crucial information to the screener. In a matter of minutes, the landlord receives comprehensive and compliant credit, criminal, eviction, and Income Insights reports plus their ResidentScore.
Tips on how to read a SmartMove credit report
It’s important to understand how to read a credit report because it’s one of the best ways to get an idea of how a prospective tenant handles their financial responsibilities. Which could be a strong indicator of renter payment reliability.
A credit report contains detailed information about past and present credit accounts. It identifies accounts in good standing and accounts that are late. It will show account balances due and payment history. The report also calls out negative accounts with late payments, or debts significantly in areas that have been sent to a collection agency.
We’ll walk you through the kinds of information contained in a SmartMove credit report.
The main parts include:
- Identifying information
- Profile summary
Basic Identifying Information
In this section, you can determine at a glance whether the applicant’s information (name, current address, recent employment history) on the credit report is the same as that included on their rental application.
This basic information can help to provide greater certainty that your prospective tenant is who they say they are.
Consumer Credit Profile Summary
This area of the applicant’s credit report is important because it provides an overall summary of the activity on file. It delivers pertinent information relation to your applicant’s consumer credit profile. It’s broken into digestible parts to appraise overall financial health and evaluate factors such as: payment history, debt-level and monthly financial obligations.
In top section, you get a snapshot of:
- Total number of tradelines, which is the sum of revolving, installment, mortgage and open accounts
- Total number of public records
- Total number of accounts sent to collections
- Total number of inquiries
In the section below, you get a snapshot of delinquency:
- Total number of derogatory credit accounts
- Total number credit accounts that have historical derogatory information
- Total number of derogatory occurrences
In the chart, you’ll get more detailed credit history information broken out by account type:
- Total number of accounts
- Highest amount owed on the account
- Maximum amount of credit approved by the lender
- Amount owed as of the date of the credit report
- Amount past due as of the date of the credit report
- Amount due monthly based on payment terms
- How much credit is available for revolving accounts
When evaluating a prospective tenant, many landlords agree that their top priority is to gain more confidence that they can get a credit-worthy tenant who will pay the rent on time. A TransUnion survey found that payment problems ranked as the top concern by 84 percent of independent landlords. They have good reason to be concerned: the cost of eviction resulting from nonpayment can run up to $10,000 (or more) in court costs and legal fees, not including the time and expense to fill an unexpected vacancy.
To that end, landlords have looked at their prospective tenant’s credit score as a beacon to determine the level of risk before signing a lease. SmartMove delivers a proprietary ResidentScore to screeners, which is a credit score built specifically for the rental industry.
At first glance, a typical credit score and SmartMove’s ResidentScore might appear similar. Both a typical credit score and SmartMove ResidentScore can help minimize risks when screening an applicant. And ResidentScore also uses the same number scale as with a generic score: 350-850. However, ResidentScore is built specifically for rental screening and is powered by analysis off of over 500,000 actual resident records. It ultimately provides a more accurate assessment of risk for your future rental property income than a typical credit score.
Below are the benefits of ResidentScore over a standard credit score:
- Identifies 15% more evictions
- Determines 19% more skips than other typical credit scores
- Scores more applicants who have thin files (can score all applicants with at least one account on their credit report)
With ResidentScore, you get a custom score that is custom to your needs. You aren’t stuck basing your decisions on the same algorithms that a bank would use to determine an outcome of a loan. Instead, you’re using a score thatspecificallyanalyzes predictors of a bad rental outcome.
Tradelines (credit account history)
Tradelines, an industry term to describe consumer accounts, including credit accounts or lines of credit, is information that’s reported to consumer reporting agencies and will appear every time you read a TransUnion credit report.
The tradelines summary is another important area because it provides an overview of various kinds of credit accounts: revolving, mortgage, installment, open and closed. These accounts include auto loans, home loans, credit cards and other kinds of credit lines, in addition to other debt obligations of the consumer.
You’ll be able to review information, such as:
- Account name
- Account type
- Credit balance
- Credit limit
- Who is responsible for paying
- Payment status
- Date of delinquency
- Date account was opened
- Date account was closed
These tradelines help you develop an overall picture of financial responsibility. You can review whether the applicant carries a high debt load and how leveraged an applicant is.
Tradelines also show current and past payment history, along with whether payments are being made on time. If payments have been received late, it’s described in more detail in buckets of 30, 60, 90, 120, or 180 days.
If a creditor determines they’re unlikely to be paid, other kinds of payment statuses will be noted. Tradelines payment history calls out derogatory accounts, which can be defined as accounts significantly late for payment and the creditor determined that the consumer is in default. Derogatory accounts stay on a credit report for seven years or longer from the latest activity date and may include foreclosure, charge-offs, and accounts reported or sent to debt collectors.
Summary of Collections
This section indicates when an account becomes significantly overdue and is another key aspect when learning how to read a credit report. This section includes accounts a creditor has sold to a professional collections agency. The collections section reports on unsecured debt, including credit cards and other kinds of personal loans. Collection information is retained on an applicant’s credit report for seven years from the first delinquency date.
Collection information that you’ll be able to review includes:
- Name of collection agency
- Account type
- MOP (Manner of Payment) code and status
- Debt collector status of collection
- Original creditor
Also included in this section is the original balance of collection and current amount in dollars owed as of the date verified.
This section displays which companies have viewed the consumer’s credit file during the last one to three years, depending on the reason of the inquiry and geographical location of the applicant. It also shows the date when inquiries occurred. This helps you get a sense of the applicant’s credit activity and inquiries. The sample credit report above shows six hard inquiries that occurred over 10–11 months. In general terms, consumers who accumulate a large number of inquiries over a short period of time could present an elevated level of risk. They’re potentially getting access to additional lines of credit and possibly overextending their financial limits.
Can I reject a tenant based on their credit report?
As you can see, a credit report can provide a wealth of information that can help you to make a well-informed decision. If you should decide not to rent to someone because of information reported in their credit check then you must adhere to applicable laws, including that you must follow FCRA regulations.
When you use SmartMove to screen your tenants, you can be even more confident that the credit report (and other tenant screening reports) are FCRA-compliant and contain information that you can trust. SmartMove tenant credit reports are provided by TransUnion, a trusted company with over 40 years of experience in the consumer reporting industry. SmartMove credit checks will provide you with the accurate insights toward making well-informed leasing decisions.
To mitigate the risk of lost or late rent payments, a costly eviction, and unforeseen tenant turnover, it’s important to consider performing credit checks on prospective tenants.
SmartMove is an easy and cost-efficient screening solution for independent landlords who want to get detailed information to make more informed screening decision without sacrificing time or accuracy.
By conducting a thorough tenant screening and using a credit report with a ResidentScore, you can better assess the risk of renting to an applicant, and use their financial history to help guide your renting decision.