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What to Look for in a Credit Report

Credit Report

If you’re a landlord who’s had a bad tenant before, you probably know the importance of tenant screening. If you don’t screen tenants thoroughly, you could end up with tenants who cause problems down the road.

One of the most important components of tenant screening is the credit report. A credit report gives you a comprehensive overview of someone’s credit history, which ultimately tells you how financially responsible they are. For landlords, this information is crucial because it helps you determine whether a tenant will consistently pay rent on time.

Performing a credit check is fairly straightforward these days. If you use property management software, you’ll have easy access to credit reports directly from the platform. The hard part is knowing what to look for when reviewing an applicant’s credit report.

Credit/Resident Score

A credit score is a simple way to assess someone’s overall creditworthiness. It’s calculated from a number of factors and is represented by a number between 300-850. 

A resident score is similar to a credit score, but it’s calculated to specifically represent rental credit habits. As a landlord, it’s helpful to use credit reports that include a resident score.

Generally, you should be wary of a tenant with a credit or resident score lower than 600. On the other hand, tenants with a credit score above 700 are likely to be trustworthy. You should always dig deeper into a credit report, rather than simply glancing at the credit score. For example, if a tenant’s credit history is short, then a single late payment could tank their score. 

Frequency and Severity of Late Payments

One of the most telling signs that a tenant might not pay rent on time is if they have a history of frequent late payments. A late payment every now and then is nothing to worry about, but a tenant who consistently misses payments is cause for concern.

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In a credit report, you’ll be able to see the frequency and severity of someone’s late payments. A tenant with more than 10 late payments is a major red flag. Furthermore, payments that come in a couple days late are far less concerning than payments that come in a few months late.

If someone missed several payments all at the same time but has consistently paid on time since then, it’s fair to assume that they had a single major financial issue that they’ve since recovered from.

Credit Report Total Monthly Payment and Income-to-Rent Ratio

Credit reports also give you information about someone’s debts. A tenant with multiple outstanding debts is in a more financially straining situation than someone with no debts, and this could indicate that they may struggle to pay rent.

As a rule of thumb, you shouldn’t rent to someone whose rent and monthly debt combined is greater than 70% of their income. For example, let’s say someone has a monthly income of $2,000, pays $500 per month in loans, and is applying for a unit that has a rent price of $1,000 (1,000 + 500 / 2,000 = 75%). Because this person’s rent and monthly debt add up to more than 70% of their income, they may be seen as financially burdened, and you shouldn’t rent to them. For similar reasons, you shouldn’t rent to someone whose monthly income is less than three times the price of rent. 

Credit Report Past Due Amount

Anytime an applicant has a past due amount on a loan/payment, you should be concerned. If the applicant isn’t current on one or more of their payments, you should ask them to find out why. If they don’t have a reasonable explanation, this is a red flag (especially if the amount is greater than the price of your rent). If an applicant has a past due amount, this likely suggests they aren’t very financially responsible.

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Running a credit check on your applicants is crucial, but if you don’t know how to decipher the information contained in a credit report, then it doesn’t do you much good. While a credit score gives you a good idea where someone generally stands with their credit, you don’t want to stop there. When reviewing a credit report, it’s important to have a comprehensive understanding of your applicant’s credit history.

It’s also important to bear in mind that a credit report doesn’t give you a complete picture of a tenant. At the end of the day, it’s up to you to take all the information you gather during tenant screening to decide whether you want to accept a tenant.

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