Judging a Person by their credit score
Your tenant screening process may include many things, but one of the most common criteria landlords use is the credit score. A credit score is a number that rates an individual's creditworthiness by weighing several factors, including credit card usage percentages and the age of credit accounts. While you may want to judge a person by the credit score alone, it's important to understand how the score is calculated and the problems that may make prospective tenants appear less creditworthy than they actually are.
How Are Credit Scores Calculated?
MyFICO calculates credit scores based on the individual's payment history, balances, length of credit history, new credit accounts and credit account diversity. The most important factors are the payment history and the credit balances across all accounts. Credit reporting bureaus look at these factors and calculate risk scores for you to use. These scores provide a guideline on whether the person is creditworthy; however, the number alone doesn't tell the whole story.
What to Look for on a Credit Report
A person with a 720 credit score could be struggling month to month with balancing their credit card payments, while someone with a 620 may have excellent financial responsibility. Credit scores come with a complete credit report at most bureaus, so you can dive deeper into the tenant's financial history.
The primary attribute to look for on a tenant screening report is whether prospective tenants make on-time payments on their debts. A clean payment history over the course of several years indicates good financial responsibility. If tenants previously had credit problems but have since cleaned up their act with consistent payments, their score may not be great despite their new-found responsibility.
Also important are the account balances of credit cards and other lines of credit. If every credit card is maxed out and the lines of credit are far beyond the tenant's income, you could be looking at a disaster in the making, even if the credit score is excellent.
The derogatory marks on a credit report contain information on unpaid accounts, collections, missed payments and other negative credit information. Two areas of debt that often cause problems with otherwise financially stable individuals are medical bills and student loans. Medical bills, particularly for uninsured tenants, can quickly spiral out of control in an emergency, particularly if the tenant couldn't work for a time. Student loans are at record numbers in the U.S., resulting in many people getting bad credit while trying to work out a payment solution with the loan company.
Public records cover information on bankruptcies, which may not necessarily be a disqualifier. Bankruptcies affect credit scores for seven years after the fact, so it's possible that a low credit score is due to a bankruptcy from years ago. If the payment history post-bankruptcy is clean, the tenant is likely to be as creditworthy as any comparable person.
Differences in Credit Scores
Credit score calculations are not created equally. MyFICO, Experian, TransUnion, and Equifax all have slightly different credit scoring systems, and individual accounts are not always reported to every credit bureau. Inaccurate information can also skew credit scores on one service, so in many cases it's helpful to get more than one score and calculate the average.
A bad credit score doesn't necessarily mean a bad tenant, and a good credit score could be masking major red flags. Look deeper into the credit report to understand what the applicant has to offer, and carefully assess whether they're able to make rent payments on time.
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