A tenant credit check is one of the three most important parts of the tenant screening process. Landlords must receive consent under the Fair Credit Reporting Act before checking a tenant’s credit.
Table of Contents:
- Purpose – why landlords should run credit checks on tenants.
- Obtaining Consent – federal guidelines landlords must abide by.
- How to Run a Credit Check – all steps & service options.
- Credit Report Details – what information a landlord receives back.
- Hard vs Soft Inquiries – how a tenant’s credit is affected by the check.
The Purpose of a Tenant Credit Check
The first reason that landlords will choose to look up a tenant’s credit score is to make sure that they can pay their bills, or that they will. Since the credit report keeps all of the information relating to a tenant’s payment history on certain accounts, as well as a record of any accounts in collections, it can be a worthy source of financial information on the tenant.
This is, of course, the main and most important reason for this check. But that’s not all that it’s good for.
A tenant’s credit report can reveal how many monthly payments they have (and how much they are), any past addresses and other identifying information, some public criminal records, and more vital information. If a landlord is willing to look deeper into a tenant’s creditworthiness, the credit report can give them more than they may need.
FCRA Compliance for Credit Checks
The Federal Credit Reporting Act requires that landlords must receive a tenant’s consent to run a credit check. Written consent can be given on the rental application form itself, via a separate consent form (see this template as an example) or through the procedures of a tenant screening service.
If you are using a tenant screening service that performs the request for consent, make sure they are FCRA compliant and take the necessary steps before ordering the credit report. These steps include the disclosure that a check is going to take place, authorization from the tenant that the check is allowed to take place, and a notification of any adverse action.
Note that even screening services that allow underwriting and can provide reports without any tenant involvement are required to comply with all FCRA standards. It’s very easy to sue companies who do not follow these rules.
How to Run a Tenant Credit Check
Here are the steps involved in running a tenant credit check.
- Collect Tenant Information – the application form should collect the tenant’s full name, addresses for the previous 2 years, social security number, date of birth, the name of their current employer and who their current landlord is.
- Choose a Credit Check Service – out of the services we’ve reviewed, we recommend CoreLogic’s MyRental service.
- Collect Tenant’s Consent – always double check that consent has been given by the tenant for FCRA compliance.
- Verify Landlord Identity – if using a tenant credit check service for the first time, a landlord must verify who they are before being given this type of sensitive information on the tenant.
- Run the Report – submit the request with the credit check service and wait for the results to come back.
How Long Does it Take to Run a Credit Check?
Typically, a tenant credit check can take between 5 minutes to 5-6 business days, depending on the service provider. Credit checks that take longer to complete usually are delayed because of required input from the tenant, a previous landlord or previous employer.
Tenant Credit Check Report Details
Not all credit reports are created equal. Depending on the service used, you may receive one of the two types of reports: shorter “pass/fail” credits reports, or full credit reports.
Sometimes, tenant screening services don’t provide a full credit report, whether to protect the tenant or to appease certain laws. When this happens, the company will provide the landlord with a pass/fail score, usually based on a set of requirements that the landlord has set forth.
This can be helpful, but it also doesn’t give landlords a full picture. Often, this check will include a list of categories, such as tradelines, inquiries, and accounts in collections. It will tell the landlord if a record exists, or how many open accounts, inquiries, or collection accounts are present on the tenant’s credit report.
Some may not even report a credit score and instead require the landlord to decide which scores they will allow and which will not be approved.
The problem with this model is that it doesn’t allow the landlord to be open-minded, or it may misrepresent information. For example, it may say that the tenant has three records in the ‘public filings’ category, where minor crimes may be listed. This can look bad, but imagine that those records are all paid speeding tickets that have nothing to do with the tenant’s ability to pay their rent or the safety of the community.
This is the type of distinction that is important for landlords to consider.
Full Credit Reports
A credit report can be a full, comprehensive report from one of the three leading credit bureaus, or it may be a simple pass/fail list of attributes. Tenant screening services may also provide anything in between. Here is some of the information that may show up on a credit report.
- Credit Score
- Personal Information
- Credit Accounts & Tradelines
- Credit Inquiries
- Public Records & Collections
A tenant’s credit score is the culmination of all of their available information, and it provides lenders and other businesses with a quick, at-a-glance summary of their creditworthiness. Scores fall between 350 and 800, and where the tenant falls on that scale depends a great deal on the number of open accounts, accounts in collections, and inquiries on their credit.
This number can be different from each reporting agency. Of the three main credit bureaus, TransUnion and Equifax use VantageScore 3.0 to report a score, whereas Experian uses FICO scores exclusively. The difference between these two score models is the way they weigh certain factors.
The use of these different score types (as well as an additional ‘educational’ score that most businesses will not use) may present a difference of a few points (and sometimes more). While the credit score is one of the most important pieces of the credit report, it’s difficult to make a decision based on the credit score alone. This is because it may not be clear which factors are being considered to produce the score.
Thankfully, some tenant screening services include a full credit report.
Most credit reports will have a section dedicated to the information that may be used to identify the potential tenant. This section likely includes the following:
- The tenant’s full name
- Past addresses
- Date of birth
- Employment information
- Social security number
When it comes to the SSN, reports will not divulge the tenant’s full number. Usually, only the last four digits are represented here to protect the tenant’s identity.
Still, this information is listed as a way to identify the tenant and to inform the landlord of how the report was populated. It doesn’t mean that only this information was considered and matched with certain records. The landlord can also match this information with what the tenant provided on their application.
Credit Accounts & Tradelines
This is one of the largest sections in a credit report and details any credit-based accounts that a tenant may have open. This can include the following types of accounts:
- Credit card accounts (or tradelines)
- Auto loans
- Revolving payment account
- Installment payment accounts
- And more
The number of accounts may be used to determine the credit score, but it is usually the information found for each individual account. For each of the account types listed above, the credit report will give the landlord the following details:
- Type of account
- The date the account was opened
- Credit limit/loan amount
- Account balance
- Payment history
- Whether payments have been made on time, and if there have been any late payments
This is the section that is the most useful for the landlord, specifically if they are looking for a tenant’s financial viability. Here, they can see how many monthly payments the tenant is obligated to make, the amount of these payments, and if the tenant is in the habit of paying them on time (or at all).
This section is often smaller and may be considered less important, though it does have an impact on the tenant’s credit score. Landlords will only be able to see hard inquiries or the inquiries that directly affect the credit score.
Multiple hard inquiries against a tenant’s credit may indicate a higher credit risk, and that’s why it affects the tenant’s score. These inquiries come from various lenders and loan companies, and each represents a time when a copy of the tenant’s credit report was sent to a third party that requested it.
Public Records & Collections
Public records such as bankruptcies and information recorded by state and county courts are included on a tenant’s credit report. Monetary judgments, liens, and other information can be found here, as well as a small peak into the tenant’s criminal history.
Bankruptcies, in particular, can impact how a landlord may view a tenant, as it wipes their debt clean. If a tenant’s debt was substantial enough to warrant a bankruptcy case, they may be subject to further consideration.
On the other hand, this section also details the accounts that the tenant has in collections. Collection companies buy debt from various lenders, utility companies, and instances where an account was not paid and there was a balance left behind. These companies are then in charge of collecting the debt, often with increased rates and aggressive methods.
If a tenant has a lot of accounts in collections, they may have gone through a rough period where they were unable to pay their bills. On the other hand, a growing number of collection accounts may indicate that they often don’t pay their bills – and this may prove to be a problem for your rental.
Hard Inquiries and Soft Inquiries
Whenever a landlord runs a credit check, the tenant may worry that their credit will be impacted. This is a valid fear, as any time a loan company, car dealership, or credit card company checks the tenant’s credit, their credit score may drop a few points.
Hard inquiries occur when tenant screening services run credit checks without the tenant’s direct input. Additionally, credit checks that occur when the tenant screening service underwrites a landlord fall into this category. Too many hard inquiries on the tenant’s credit can start to affect their credit score, and these inquiries can take years to fall off.
On the other hand, tenant screening services that include tenant involvement do not perform these hard credit checks. The tenant enters their own information into the form, and the results are much the same as if they had requested their own credit reports. These types of checks are soft inquiries, and they do not impact the tenant’s credit. They won’t show up on the list of inquiries on a tenant’s credit in most cases, either.
Keep this in mind when choosing a tenant screening service. Using a service with a soft inquiry can make tenants more comfortable applying, as they know it isn’t going to harm them in the long run.