Landlording & Rental Properties

How to Run and Understand a Tenant Credit Check

Expertise: Landlording & Rental Properties
24 Articles Written
credit report tenant screening

A tenant credit check is one of the real estate investor's most valuable screening tools. Credit reports provide a broad overview of an applicant's financial state—before you give access to your rental property. Do they pay their bills on time? Are they underwater in consumer debt?

Ignore the temptation to glance at the credit score and give a thumbs-up. Clues into an individual’s behaviors lie behind that number, and they’re vital to the tenant screening process. Landlords and investors can look at the information included on a credit report to get the best insight on a rental applicant’s financial stability and bill-paying history.

A history of late payments or outstanding balances may indicate that the individual will make late rent payments. Outstanding or unpaid bills are red flags, too.

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What You’ll Learn in This Article:

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  1. What can a credit report tell landlords?

What Can a Credit Report Tell Landlords?

A credit report provides information on an individual’s financial and bill-payment history.

A full tenant credit report will give details about:

  • Trade lines: The type of account, date opened, credit limit or loan amount, account balance, and payment history.
  • Credit inquiries: Any time a copy of a credit report is accessed, it appears as a credit inquiry.
  • Public records and collections: Information from state and county courts and overdue debt from collection agencies, bankruptcies, foreclosures, suits, wage garnishments, and liens.

 

A FICO credit score provides much less information. In short, it's a number assigned to individuals based on information on their credit report. Useful shorthand, but not always the big picture. However, an applicant's credit score is fairly straightforward and easy to understand, so a lot of landlords default to it. But in reality, it's not the best way to measure someone's financial ability.

A good FICO score indicates that someone likely can pay rent—but a bad credit score isn't good evidence that they can't.

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For example, imagine a tenant who lost their job due to reasons beyond their control, such as a layoffs. While unemployed and struggling, they missed a few bill payments. That doesn’t necessarily make them a huge risk, despite their lowered credit score.

Some landlords require a minimum credit score to qualify. Others prefer a more extensive tenant credit check. There’s no right or wrong answer—it depends on what works for you and your business.

How to Run a Tenant Credit Check

There are a number of services and options available to access your prospective tenant’s credit report. You can run credit checks online with your applicant’s permission (typically provided on a rental application). Alternatively, ask your applicants to order their report and provide you with view access. An online tenant-screening service can provide instant results, too.

The three major credit bureaus all service landlords, and pulling a report won’t run you much.

  • Equifax offers a full tenant screening report, including pulling credit reports from all three bureaus and running criminal background checks and eviction reports.
  • Experian’s no-fee tenant credit check service provides basic financial information.
  • TransUnion’s SmartMove screening service provides basic background and credit information.

What information do I need to run a credit check?

Here’s what you’ll need to know about your tenants to run a credit check:

  • Full legal name, as well as any variations (like a maiden name)
  • Previous addresses for the past two years
  • Social security number
  • Date of birth

Some credit check companies may ask for additional information. Make sure you know exactly what information your service needs beforehand.

Additionally, some services—like Cozy—allow prospective tenants to input their information themselves.

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Interpreting the Renter Credit Report

This is the real meat and potatoes. The credit report lists every single open account, typically going back seven years on closed accounts.

Each account listed includes details such as account status (current or open, closed, charged off), balance, credit limit, date of last payment, and more.

Accounts are divided into “adverse” accounts, in which a missed (or in some cases even late) payment or payments have occurred, and “satisfactory” or “in good standing” accounts, which were paid off on time.

The three most relevant aspects of a potential tenant’s credit report are:

  • The frequency of late payments made to all creditors
  • The number, type, and amount owed of collections/charge-offs
  • The ratio of outstanding debt (monthly payments) to monthly income.

Frequency of late payments and patterns

Each account includes the payment history of that bill for at least the past year. Was it paid on time or late each month? Most also say how late the payment was—30, 60, or 90 days late. Ideally, you’ll skim through these sections seeing a list of all on-time payments, but that almost never happens in real life.

What you’re looking for in the tenant credit check are patterns—like if several accounts had late payments all at the same time. That probably means the applicant had a single financial catastrophe and recovered. Not worth holding against them.

But if you see various late payments on multiple accounts, the applicant is having constant financial difficulties or doesn’t take their debts seriously.

A random late payment here and there most likely doesn’t indicate an issue. Multiple random late payments or patterns with no logical explanations demand more information.

Outstanding and historical collections and charge-offs

You can tell a lot about an applicant looking at their collections or charge-off accounts. (For those not familiar with the term “charge-off,” it’s usually a collection account the creditor has chosen not to pursue.)

Important caveat: Medical collections can usually be ignored—people often have to seek medical treatment, even when they can’t afford it.

Look for patterns in their credit history. Do they get credit cards, charge them up, and then stop paying? Do they have multiple cell phone accounts they never paid? What about utility collection accounts? How will they put utilities in their name?

Monthly payments owed: rent-load vs. debt-load

During a tenant credit check, look at the total amount of credit payments, including every "above-the-table" debt, such as car payments, credit card minimums, and student loans.

You might require applicants to have an income equal to three times your rent. But what happens if they meet that requirement, but have a ton of credit card and student loan monthly payments?

Subtract all their monthly payments from their income and then see if the remainder is three times your rent. If it isn’t, how will they afford to pay you?

Credit Report Red Flags

Even if your rental applicant has a 600-plus credit score, you can benefit from examining the credit report in detail. If you see the following, it could be a red flag that they have poor financial habits and may not be able to pay rent on time, if at all.

  • Car repossessions
  • Credit card charge-offs
  • Collection accounts, meaning the company that once owned it deemed it uncollectable and decided to take a loss rather than hold onto the debt
  • Accounts that were never paid off and were instead closed with a balance or sent to collections
  • Accounts that were often paid late (look for entries like “CURR WAS 30-7,” which translates as “is now current, but was 30 days late seven times between being opened and today”).

RELATED: 12 Must-Ask Landlord Reference Check Questions

Credit Report Gray Areas

A negative mark during the tenant credit check doesn’t always equate to instant rejection. Small mistakes, like a late payment on an account that is now current, are less important than a major charge-off or collections.

If you see the following items on an applicant’s credit report, they may still be a qualified tenant:

  • One or two late payments on an account that is now current
  • High medical debt from medical bills
  • Foreclosures.

If your rental applicant has a credit score that is right on the edge of approval, take a look at the details. If they are currently rebuilding their credit and have paid off all their collections or have high medical debt, you may be working with a less-risky tenant.

How have credit reports helped you weed through tenant applications? Share your experiences in the comments below!

Aside from being a landlord and real estate investor himself, Nathan founded Rentec Direct, a software company that serves the rental industry. Today he works with over 13,000 landlords and proper...
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    Adam Schneider Flipper/Rehabber from Raleigh, NC
    Replied over 2 years ago
    Well written post. I didn’t know how they came up with the FICO. Thanks.
    Paul Ewing Investor from Boyd, Texas
    Replied over 2 years ago
    Personally I don’t consider a foreclosure to be a grey area. If they aren’t going to make mortgage payments to save their own house, they aren’t going to give a flip about paying rent on time.
    Nathan Miller Property Manager from Grants Pass, OR
    Replied over 2 years ago
    Hi Paul, That can certainly be the case in some cases. In other cases, prior home owners who lost their homes due to something like a family illness, loss of job, or other factors outside of their control can also make the best renters. Fortunately, unless you live somewhere crazy like Seattle, you can make your own policies to accept or reject based on your own criteria. Just keep the criteria the same for everybody.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied over 2 years ago
    Very good breakdown! This topic is almost always glossed over, glad you covered it!
    Katie
    Replied over 2 years ago
    Personally, I have found the credit report less than useful. It does not tell me what I really need to know about the tenant. Are they clean? Will they respect the property? Are they quiet? Some of the best tenants don’t even have credit reports because they are not Americans,and some Americans who lived overseas for a long time in a cash economy might not have a credit report. they should not be refused simply for lack of a credit report.
    Paul Ewing Investor from Boyd, Texas
    Replied over 2 years ago
    There is a difference between no credit and bad credit. No credit can be explained by many factors such as you indicated. A string of utility bills in collections, foreclosure, and unpaid credit cards are totally different.
    Katie
    Replied over 2 years ago
    Nevertheless, there are many landlords, some even on BP, who say, “No credit? Good bye.”