Evaluating Credit Reports: Score vs. Content for Tenant Screening

by | BiggerPockets.com

Credit reports are one of the most valuable tools for landlords and property managers when screening tenants.

But an individual’s credit score is more than just a number on a report. Beyond the number are clues into an individual’s behaviors that have resulted in earning that particular credit score. 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.

Related: THIS is Hands Down the Best Indicator of Tenant Quality

The Bad and the Not-So Bad

Negative marks in certain areas beyond the credit score, like an unpaid collection, could indicate an unqualified tenant and a risky rental situation. In other situations, a seemingly negative mark on a credit report, like unpaid medical bills, could be worth ignoring in order to fill your vacancy.

This article will look at the different areas of a tenant’s credit report that are used to determine if the applicant will be a qualified renter. I will explore what may indicate a red flag, and what may be OK to look past on in certain situations.

First let’s look at why you should perform a credit check on potential renters as part of your tenant screening process.

The Importance of Credit Reports for Tenant Screening

Credit reports give you valuable insight into a rental applicant’s bill-paying history. As a landlord, one of your responsibilities for making an informed rental-approval decision means finding out if your future tenant has the ability to pay rent on time. Taking a look at a credit report is the best (and legal) way to determine if your applicant pays other bills on time.

A history of late payments or outstanding balances may indicate that the individual will make late rent payments. If the tenant has outstanding or unpaid bills, it is a red flag, suggesting that he or she may be in a poor financial position.

Credit Report vs. Credit Score

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

A full credit report will give details about:

  • Trade Lines: Credit lenders report on the type of account, the date opened, the credit limit or loan amount, the account balance, and the payment history.
  • Credit Inquiries: Any time a copy of a credit report is accessed, it appears as a credit inquiry.
  • Public Records and Collections: These include information from state and county courts, overdue debt from collection agencies, bankruptcies, foreclosures, suits, wage garnishments, and liens.

A credit score is a number assigned to individuals based on information on their credit report. According to Time.com, a FICO score is based on “35 percent payment history, 30 percent amount owed, 15 percent length of history, 10 percent new credit, 10 percent types of credit used.”

Some landlords choose to have use a minimum credit score as a factor for qualifying rental applicants. Other landlords will look into the details on an applicant’s credit report to determine if he or she will be a qualified tenant.

Credit Report Red Flags

If you see the following details on a rental applicant’s credit report, 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
  • Accounts currently in collections

So even if your rental applicant has a credit score above 600, you can benefit from looking at the details of the credit report. Perhaps there are recent items on the credit report that may indicate a risky rental scenario.

Credit Report Gray Areas

Sometimes a negative on a credit report does not mean grounds for 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 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 of the report. If they are currently rebuilding their credit and have paid off all their collections or have high debt from medical bills, you may be working with a less-risky tenant.

Related: How to Read a Credit Report: Tenant Screening in Detail

Debt from Medical Bills

Large medical bills can make up a big portion of an individual’s debt, which may negatively affect his or her credit score.

An uninsured person can find themselves with tens (or hundreds) of thousands of dollars in medical bills for even a short hospital visit. It is impractical for most people to pay these bills at the time of the visit, so the bills often get turned into collections. Because of this, medical debt is not typically used as an indicator of a tenant’s credit worthiness.

If you have a rental applicant with unpaid medical bills on their credit report, understand that a portion of their income could be reserved for garnishment, reducing the amount of available income that can be used for rent.

Where to Find Tenant Credit Reports

There are a number of services and options available to access your rental applicants’ credit report. You can order credit reports online with your applicant’s permission (typically provided on a rental application). Another option is to have your applicants order the report themselves and provide you with access to view the report. Ordering reports yourself is usually faster, as you are in control of the process. An online tenant-screening service should provide instant results.

What Other Tenant Screening Reports Do I Need to Make a Smart Approval Decision?

Credit reports are not the only background reports you should pull to protect your investment from a risky rental situation. Criminal-background and eviction-history reports provide extremely valuable information about your rental applicants. Landlords can typically order complete tenant-screening packages on rental applicants for $15-$45, including credit, criminal, and eviction history.

A Reminder About Tenant Screening Laws

While landlords are legally allowed to use credit reports and other background reports for tenant screening, you must make sure you are following Federal Fair Housing laws and the Federal Credit Reporting Act. It is your responsibility to know the law.

According to the Federal Fair Housing Act, you must treat all your rental applicants equally. You are not allowed to make a subjective rental decision based on known or unknown preferences or feelings.

You can only screen based on known facts about a rental applicant that indicate an unqualified renter according on your legal written screening criteria, like poor credit history or insufficient income.

The Federal Fair Credit Reporting Act outlines details about how to legally access sensitive information on an applicant’s credit report and how to keep that information secure and private.  You will also find information about how to legally deny a rental applicant if you discover they are unqualified to rent based on information found in their credit report.

Final Thoughts

Looking beyond a rental applicant’s credit score into the details outlined within the credit report will help you make the most informed tenant screening decision with regard for who to accept as your next tenant.

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

About Author

Nathan Miller

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 property managers by providing them automation software and education to effectively manage their rentals.

4 Comments

    • Nathan Miller

      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.

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here