{"id":95385,"date":"2020-01-12T14:30:29","date_gmt":"2020-01-12T21:30:29","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=95385"},"modified":"2023-03-20T15:04:27","modified_gmt":"2023-03-20T21:04:27","slug":"evaluating-credit-reports","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/evaluating-credit-reports","title":{"rendered":"How to Run and Understand a Tenant Credit Check"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm?e=BIGPOC1662306440&#038;light=false\" width=\"100%\"><\/iframe>  \n\n\n\n<p>A tenant credit check is one of the real estate investor&#8217;s most valuable screening tools. Credit reports provide a broad overview of an applicant\u2019s financial state\u2014before you give access to your rental property. Do they pay their bills on time? Are they underwater in consumer debt?<\/p>\n<p>Ignore the temptation to glance at the credit score and give a thumbs-up. Clues into an individual\u2019s behaviors lie behind that number, and they&#8217;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\u2019s financial stability and bill-paying history.<\/p>\n<p>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.<\/p>\n<p><em><strong>RELATED: <\/strong><a href=\"https:\/\/www.biggerpockets.com\/blog\/6-tips-staying-compliant-fair-housing-laws\" target=\"_blank\">The Fair Housing Act and Landlords: What You Should Know<\/a><\/em><\/p>\n<blockquote>\n<p><em>What You&#8217;ll Learn in This Article<\/em>:<\/p>\n<ol>\n<li>What can a credit report tell landlords?<\/li>\n<\/ol>\n<\/blockquote>\n<h2>What Can a Credit Report Tell Landlords?<\/h2>\n<p>A credit report provides information on an individual\u2019s financial and bill-payment history.<\/p>\n<p>A full tenant credit report will give details about:<\/p>\n<ul>\n<li><strong>Trade lines<\/strong>: The type of account, date opened, credit limit or loan amount, account balance, and payment history.<\/li>\n<li><strong>Credit inquiries<\/strong>: Any time a copy of a credit report is accessed, it appears as a credit inquiry.<\/li>\n<li><strong>Public records and collections<\/strong>: Information from state and county courts and overdue debt from collection agencies, bankruptcies, foreclosures, suits, wage garnishments, and liens.<\/li>\n<\/ul>\n<p>A FICO credit score provides much less information. In short, it\u2019s a number assigned to individuals based on information on their credit report. Useful shorthand, but not always the big picture. However, an applicant\u2019s credit score is fairly straightforward and easy to understand, so a lot of landlords default to it. But in reality, it\u2019s not the best way to measure someone\u2019s financial ability.<\/p>\n<p>A good FICO score indicates that someone likely can pay rent\u2014but a bad credit score isn\u2019t good evidence that they can\u2019t.<\/p>\n<figure id=\"attachment_125930\" aria-describedby=\"caption-attachment-125930\" style=\"width: 706px\" class=\"wp-caption alignnone\"><a href=\"https:\/\/www.biggerpockets.com\/guides\/landlord-rental-property-management?itm_source=ibl&amp;itm_medium=blogad&amp;itm_campaign=llguide\" target=\"_blank\"><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-125930 size-full\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/12\/How-to-Become-a-Landlord-Blog-Ad.jpg\" alt=\"promotion for how to become a landlord guide\" width=\"706\" height=\"125\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/12\/How-to-Become-a-Landlord-Blog-Ad.jpg 706w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/12\/How-to-Become-a-Landlord-Blog-Ad-300x53.jpg 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/12\/How-to-Become-a-Landlord-Blog-Ad-702x125.jpg 702w\" sizes=\"auto, (max-width: 706px) 100vw, 706px\" \/><\/a><figcaption id=\"caption-attachment-125930\" class=\"wp-caption-text\"><em>Purchasing your first rental property is just the beginning of your real estate journey, because being a good landlord is almost as important as making good deals. BiggerPockets&#8217; free guide <\/em><a href=\"https:\/\/www.biggerpockets.com\/guides\/landlord-rental-property-management?itm_source=ibl&amp;itm_medium=blogad&amp;itm_campaign=llguide\" target=\"_blank\">How to Become a Landlord: Managing Rental Properties for Real Estate Investors<\/a><em> will teach you everything\u2014from setting rent to handling evictions.<\/em><\/figcaption><\/figure>\n<p>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\u2019t necessarily make them a huge risk, despite their lowered credit score.<\/p>\n<p>Some landlords require a minimum credit score to qualify. Others prefer a more extensive tenant credit check. There\u2019s no right or wrong answer\u2014it depends on what works for you and your business.<\/p>\n<h2>How to Run a Tenant Credit Check<\/h2>\n<p>There are a number of services and options available to access your prospective tenant\u2019s credit report. You can run credit checks online with your applicant\u2019s 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.<\/p>\n<p>The three major credit bureaus all service landlords, and pulling a report won\u2019t run you much.<\/p>\n<ul>\n<li><a href=\"https:\/\/www.equifax.com\/business\/resident-and-tenant-screening\/\" target=\"_blank\" rel=\"noopener\">Equifax<\/a> offers a full tenant screening report, including pulling credit reports from all three bureaus and running criminal background checks and eviction reports.<\/li>\n<li><a href=\"https:\/\/connect.experian.com\/credit-check\/tenant-credit-check.html\" target=\"_blank\" rel=\"noopener\">Experian<\/a>\u2019s no-fee tenant credit check service provides basic financial information.<\/li>\n<li><a href=\"https:\/\/www.transunion.com\/product\/smartmove\" target=\"_blank\" rel=\"noopener\">TransUnion<\/a>\u2019s SmartMove screening service provides basic background and credit information.<\/li>\n<\/ul>\n<h3>What information do I need to run a credit check?<\/h3>\n<p>Here&#8217;s what you&#8217;ll need to know about your tenants to run a credit check:<\/p>\n<ul>\n<li>Full legal name, as well as any variations (like a maiden name)<\/li>\n<li>Previous addresses for the past two years<\/li>\n<li>Social security number<\/li>\n<li>Date of birth<\/li>\n<\/ul>\n<p>Some credit check companies may ask for additional information. Make sure you know exactly what information your service needs beforehand.<\/p>\n<p>Additionally, some services\u2014like Cozy\u2014allow prospective tenants to input their information themselves.<\/p>\n<p><em><strong>RELATED: <\/strong><a href=\"https:\/\/www.biggerpockets.com\/blog\/property-manager-tasks\" target=\"_blank\">What Does a Property Manager Do? Here\u2019s the Job Description<\/a><\/em><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-95670\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2018\/01\/bitingpen.jpg\" alt=\"\" width=\"702\" height=\"468\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2018\/01\/bitingpen.jpg 702w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2018\/01\/bitingpen-300x200.jpg 300w\" sizes=\"auto, (max-width: 702px) 100vw, 702px\" \/><\/p>\n<h2>Interpreting the Renter Credit Report<\/h2>\n<p>This is the real meat and potatoes. The credit report lists every single open account, typically going back seven years on closed accounts.<\/p>\n<p>Each account listed includes details such as account status (current or open, closed, charged off), balance, credit limit, date of last payment, and more.<\/p>\n<p>Accounts are divided into \u201cadverse\u201d accounts, in which a missed (or in some cases even late) payment or payments have occurred, and \u201csatisfactory\u201d or \u201cin good standing\u201d accounts, which were paid off on time.<\/p>\n<p>The three most relevant aspects of a potential tenant&#8217;s credit report are:<\/p>\n<ul>\n<li>The frequency of late payments made to all creditors<\/li>\n<li>The number, type, and amount owed of collections\/charge-offs<\/li>\n<li>The ratio of outstanding debt (monthly payments) to monthly income.<\/li>\n<\/ul>\n<h3>Frequency of late payments and patterns<\/h3>\n<p>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\u201430, 60, or 90 days late. Ideally, you\u2019ll skim through these sections seeing a list of all on-time payments, but that almost never happens in real life.<\/p>\n<p>What you\u2019re looking for in the tenant credit check are patterns\u2014like 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.<\/p>\n<p>But if you see various late payments on multiple accounts, the applicant is having constant financial difficulties or doesn\u2019t take their debts seriously.<\/p>\n<p>A random late payment here and there most likely doesn\u2019t indicate an issue. Multiple random late payments or patterns with no logical explanations demand more information.<\/p>\n<h3>Outstanding and historical collections and charge-offs<\/h3>\n<p>You can tell a lot about an applicant looking at their collections or charge-off accounts. (For those not familiar with the term \u201ccharge-off,\u201d it\u2019s usually a collection account the creditor has chosen not to pursue.)<\/p>\n<p>Important caveat: Medical collections can usually be ignored\u2014people often have to seek medical treatment, even when they can\u2019t afford it.<\/p>\n<p>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?<\/p>\n<h3>Monthly payments owed: rent-load vs. debt-load<\/h3>\n<p>During a tenant credit check, look at the total amount of credit payments, including every \u201cabove-the-table\u201d debt, such as car payments, credit card minimums, and student loans.<\/p>\n<p>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?<\/p>\n<p>Subtract all their monthly payments from their income and then see if the remainder is three times your rent. If it isn\u2019t, how will they afford to pay you?<\/p>\n<h2>Credit Report Red Flags<\/h2>\n<p>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.<\/p>\n<ul>\n<li>Car repossessions<\/li>\n<li>Credit card charge-offs<\/li>\n<li>Collection accounts, meaning the company that once owned it deemed it uncollectable and decided to take a loss rather than hold onto the debt<\/li>\n<li>Accounts that were never paid off and were instead closed with a balance or sent to collections<\/li>\n<li>Accounts that were often paid late (look for entries like \u201cCURR WAS 30-7,\u201d which translates as \u201cis now current, but was 30 days late seven times between being opened and today\u201d).<\/li>\n<\/ul>\n<p><em><strong>RELATED: <\/strong><a href=\"https:\/\/www.biggerpockets.com\/blog\/landlord-reference-questions\" target=\"_blank\">12 Must-Ask Landlord Reference Check Questions<\/a><\/em><\/p>\n<h2>Credit Report Gray Areas<\/h2>\n<p>A negative mark during the tenant credit check doesn\u2019t 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.<\/p>\n<p>If you see the following items on an applicant\u2019s credit report, they may still be a qualified tenant:<\/p>\n<ul>\n<li>One or two late payments on an account that is now current<\/li>\n<li>High medical debt from medical bills<\/li>\n<li>Foreclosures.<\/li>\n<\/ul>\n<p>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.<\/p>\n<p><a href=\"https:\/\/www.biggerpockets.com\/webinars?utm_source=renewsblog\" target=\"_blank\" rel=\"noopener noreferrer\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-91217\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/08\/blog_ads-01.jpg\" alt=\"\" width=\"700\" height=\"85\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/08\/blog_ads-01.jpg 700w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/08\/blog_ads-01-300x36.jpg 300w\" sizes=\"auto, (max-width: 700px) 100vw, 700px\" \/><\/a><\/p>\n<p><strong>How have credit reports helped you weed through tenant applications? Share your experiences in the comments below!<\/strong><\/p>","protected":false},"excerpt":{"rendered":"<p>Going beyond a renter&#8217;s credit score and checking out the details within the credit report will help you make the most informed tenant-screening decisions.<\/p>\n","protected":false},"author":132929,"featured_media":95386,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5183,7119],"tags":[7041,7042],"class_list":["post-95385","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-landlording","category-biggerpockets-daily","tag-landlord-seo","tag-seo-optimization"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/95385","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/132929"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=95385"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/95385\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/95386"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=95385"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=95385"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=95385"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}