How to Analyze a Tenant Credit Report

How to Analyze a Tenant Credit Report

Last Updated: December 28, 2022 by Cameron Smith

A landlord’s main goal with tenant screening is to find tenants that are likely to pay rent, on time, every month for a long period of time. The applicant’s credit score is perhaps the best catchall metric for measuring the applicant’s ability to pay rent for the foreseeable future.

A tenant with a poor credit history is more likely to be evicted because they already have a history of not meeting their financial obligations. With eviction costs ranging from $3,500 to $10,000, a landlord should pay close attention to an applicant’s credit history.

What is Included in a Credit Score?

First of all, let’s clarify credit score and credit history.

A credit history is a detailed list of their financial activity, especially relating to debts. A credit score is their credit history all summed up into a single number, ranging from 300 to 850. Most commonly, a credit score is defined as the consumer’s ability to pay off debt.

For example, a credit score above 700 usually indicates a good track record of paying off debts. Someone with a score of 500 means they either have a very short history, or have had major issues with paying debts.

A credit history generally contains:

  • Open credit accounts (credit cards, mortgages, and loans)
  • Date opened
  • Credit limit or loan amount
  • Account balance
  • Highest account balance
  • Monthly payment
  • Recent payment
  • Closed accounts
  • Payment history – This includes all on-time and missed payments
  • Public records – this included bankruptcies, lines, foreclosures, court judgments, divorces, and more
  • Credit inquiries – List of any person or company that has requested your credit report, whether voluntary or involuntary.

Each of these factors has a differing impact on credit score. For example, 35% of a FICO score comes from payment history.

How Long Do Items Remain on a Credit Score

As a landlord, just because you don’t see a bankruptcy or missed payments on a credit report doesn’t mean the applicant never had any. It could just mean enough time has passed that those have fallen off the report.

While it may have fallen off a consumer report, perhaps a prior landlord will mention it. However, the Fair Credit and Reporting Act (FCRA) limits how long negative information can be used in consumer reports. So if you do find information in this manner, be careful not to use it as the basis for denying an application.

Here’s how long different items remain on a credit report:

  • Bankruptcy – Depending on the type, bankruptcies remain for 7 to 10 years.
  • Late Payments – Even if they are eventually paid, they still remain on a credit report for 7 years.
  • Collections or charged-off accounts – These are essentially missed payments. They stay on your report for 7 years.
  • Hard inquiries – These happen when a company requests a copy of your credit report in order to provide you a service, such as applying for a loan or credit card. They stay on your credit report for 2 years.

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What Minimum Credit Score Should Landlords Require?

This isn’t a simple question to answer because of how many factors are involved. Let’s start with the different classifications of credit scores, according to Equifax:

  • 800-850 = Excellent
  • 740-799 = Very good
  • 670-739 = Good
  • 580-669 = Fair
  • 300-579 = Poor

Many landlords will set a score that is an absolute baseline minimum. No matter the reason why or how the applicant can explain their score, the landlord will not consider their application. The exception would be if they volunteer to bring a co-signer, which would mean having someone financially responsible for rent on the lease with a much higher credit score.

While most landlords would like to see a considerably higher credit score, a good minimum starting point could be that they must be above the “poor” range—580 or higher.

Having a set minimum standard helps landlords weed out many applications right from the start very quickly. This is essential if a property has dozens of applicants.

However, be sure that you keep those same minimum standards for everyone, or you risk being the subject of a discrimination lawsuit

Should Landlords Accept a Rental Applicant With a Low Credit Score?

The answer is that it depends. As mentioned in the previous section, having a minimum acceptable level for credit can help sort out the most unqualified applicants. But what about applicants in the fair range? Are they worth considering?

Here are a number of factors to consider when looking at applicants with a lot credit score:

Strength of Application

The best reason to consider an applicant with a low credit score would be if the rest of their application is pristine.

If a low credit score is accompanied by:

  • Good rent-to-income ratio
  • Strong references
  • Good communication skills
  • Willingness to follow all rules
  • No criminal background
  • No eviction history

Then that would be someone to consider. On the other hand, a poor credit score accompanied by a lackluster application would almost certainly be someone to dismiss out of hand.

Length of Credit History

Someone who’s brand new to having a credit history may not have a spectacular score. They don’t start at the bottom (300), but they won’t start with an 850 credit score, either.

If they are someone who doesn’t have negative marks yet, has a good income, and the references give positive reviews, then this is an applicant that should be considered.

Also, if you’re in student housing, you may have to disregard credit history altogether as many of them will have no prior history.

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Elapsed Time Since Negative Marks

Some marks on a credit history can be detrimental for a long time. It’s possible that a tenant with a spotless history for a few years can still have a poor credit score, especially if before that they had missed payments, bankruptcies, or other negative items.

However, if 3-4 years have passed and the applicant has had no issues, then a landlord may want to consider renting to that person. Another mitigating factor could be if the applicant was very young (like 18-20 years old) when the negative marks happened.

Actions That Led to a Low Credit Score

There are plenty of reasons a credit score can be low, and some are less relevant to a rental property.

While no landlord wants to see a poor credit score, it’s a good idea to dig deeper into their history. For example, a history of missed rental payments or evictions should be considered differently than someone who bought a car that was too expensive and couldn’t pay it off.

Some landlords won’t see much of a difference. A missed payment is a missed payment. Every landlord has the right to decline an application for a poor credit score, but digging deeper into a credit history can help decide between the two remaining applicants.

Number of Other Applicants

While every landlord hopes for dozens of highly qualified applicants, that isn’t always going to be the case. If only 2-3 applicants make it through the initial screening process, then the landlord can’t be very picky.

It’s possible that every applicant left might have significant issues. At that point, you may decide that the applicant with a low credit score is your best option.

However, you could decide to reopen for more applications, perhaps with a lower price or different marketing. The downside is keeping a property vacant for longer, which costs property owners over $2k per month, on average.

The advantage would be to get a better tenant in the property, ideally one who’ll stay for the long haul. After all, if you settle for a lower quality tenant, you’re more likely to have to deal with an eviction or unplanned vacancy down the road.

Any Extenuating Circumstances

Any good landlord will dig deeper than just looking at a score or credit history—provided the applicant meets the minimum score set by the landlord.

For example, the applicant may have lost their job a few years back and couldn’t make payments for a little bit. Maybe now they have a better job than ever and make significantly more money than is required to rent property.

Or, perhaps they had catastrophic medical bills that they couldn’t pay and had to declare bankruptcy. Now it’s been a few years and they are in much better financial shape.

While it’s within a landlord’s right to disqualify those applicants, they might be missing out on a great applicant by not seeking to understand the situation fully.

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How Should Landlords Handle Tenants With No Credit History?

Perhaps the best way to look at this would be to look at the strength of their application, and most importantly, their income.

This person may have just graduated college and immediately landed a 6-figure job in their field and they have no debt. In this case, that’s likely to be a great person to have in your property.

You can also look at the silver lining of having no credit history: they’ve never given you a reason that they won’t be responsible with paying rent each month. This determination can be made on a gut feeling by the landlord. While having hard facts to work with is a better way to run a business, the person may give off a confident, responsible vibe. It’s not easy to explain, but you know it when you see it.

Of course, you should still take steps to protect yourself from applicants with no credit history.

How to Mitigate Risk of Accepting Applicants With Low (or No) Credit Scores

If you decide to take on someone with poor credit, here are a few of the actions that you can take to protect yourself against a future eviction or unplanned vacancy:

  • Charge higher rent – As long as you’re not raising rent (or doing anything else in this list) because someone belongs to a protected class, then you’re legally allowed to do this. Raising the rent allows you to put away a little more money each month in the event the tenant costs you money.
  • Require higher security deposit – Security deposits are commonly a month’s rent, or first and last month’s rent. You can get away with charging an extra month or two to cover yourself, but realize this may price some people out of your rental.
  • Require a co-signer – This means that someone else will sign the lease with the applicant, and that person is financially responsible for the rent if the applicant does not meet their responsibilities. This is fairly common for parents to do with children who are renting for the first time.