A tradeline is any item on a credit report, whether positive or negative. Negative tradelines indicate credit-harming behavior such as paying bills late or having debts in collection. When you're screening potential tenants, negative tradelines on a credit report are a bad thing, but some are worse than others.
What Goes on a Credit Report?
Many landlords only look at the FICO score when they're screening tenants, and that may be all you need. A FICO score is effectively an overview of a potential tenant's credit history. But if a tenant's application is marginal, and you want more information, you may want to dig into the credit report line by line, in search of negative tradelines.
When looking at a credit report, keep in mind that most bills factor into a person's credit report. However, while paying a bill late damages credit, most billing agencies do not regularly report on-time payments to agencies. As a result, you see bad behavior in credit reports, but not good behavior. Even when looking at individual tradelines, you may not be getting the full story about your applicant's financial history.
Late Bill Payments
While late bill payments aren't a good thing, they're perhaps one of the more benign negative tradelines, and they likely only take the credit score down a few points. Even the most responsible people sometimes pay the power bill a few days late. However, if you see habitually late payments or extremely delayed payments, it could indicate irresponsibility, carelessness, spotty income or a period of unemployment. Be sure to check back several months in the credit report to determine if it's a one-off or a pattern and if the problem has been resolved.
Nonpayments of Bills
Nonpayment of bills are worse tradelines than late payments. Check your local laws, but in general, you're within your rights to stop processing an application if the applicant has outstanding utility bills or bills that have gone to collections. You can, if you want, resume processing once the tenant has paid these, and you've confirmed payment.
A bankruptcy remains on a credit report for seven years in the event of a Chapter 13, and 10 years from the date of filing for Chapter 7. This is a very serious mark against a prospective tenant, but keep in mind that seven to 10 years is plenty of time for your renters to turn things around. They may have made bad decisions in the past, or found themselves in a tight spot, and have since worked their way out of it. When you see old bankruptcies on the credit report, take the time to examine the rest of the application more carefully so you can come to a fully informed decision about the tenant.
If prospective tenants have an account open at a collections agency, this is reflected on the credit report. Even if they've paid off the debt and closed the account, it often shows up as a negative tradeline for many months after the account's been closed. Depending on how strict you are, and the range of applicants you have to choose from, you may choose to take that very seriously. Or you may give the tenants a pass because they've done everything they can to clear their debt. When weighing the severity of this kind of tradeline, it's a good idea to look at the rest of the application so you can get the complete story.
Collections information is often confidential, and collections agencies won't likely give you many details about your applicants, but talking to your prospective tenants may reveal things. If it's a utility bill or a medical bill, you may be willing to let that slide, especially if they've been making payments. However, if there's outstanding rent that's gone to collections, especially if it's still unpaid, be very wary. There's no guarantee the tenants won't do the same thing to you.
Negative Tradelines and the Length of Credit History
When looking at negative tradelines, take into account the length of the applicant's credit history. Just because people don't have many negative tradelines on their credit reports doesn't mean they're model tenants. If they don't have a very long credit history, especially if they're older, having good credit isn't worth much.
When you're screening a tenant, not all negative tradelines in a credit report are created equal. Go through the report line by line to see why the potential tenant's credit is the way it is and to figure out patterns of behavior. Some negative tradelines might be acceptable to you; others should be avoided because they present too much risk.
A credit report isn't the only thing to look at when screening a tenant. Even if people have mediocre credit, they may make up for it with a good income and an excellent rental history. If you don't have a stellar pool of applicants, look at a tenant's whole history, rather than just part of it, to make sure you understand who your prospective tenants really are.
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