Tenant Credit Check: How to Read and Understand the Report

Your choice of tenant can mean the difference between dealing with problems like late payments almost every month — potentially even an eviction — and a stress-free experience where you’re able to earn a ‘passive’ income. There are several ways to assess a rental application, but one of the most important is to request a tenant credit check as part of their tenant screening report. This gives you a better picture of the applicant’s financial situation, and it’s one of the best ways to determine if a tenant is likely to pay rent on time.

You want to be upfront about whether you will be running a credit check, and may even want to include this in your rental listing to prevent applicants who won’t qualify from even applying.

Check out our article for more tips and advice on how to create a rental listing.

Why Is It Important to Run a Tenant Credit Report Before Renting a Property?

Running a credit report for renters is one of the crucial steps in searching for the ideal tenant (you can check out the others in our article on how to find good tenants). A credit report will tell you crucial information about applicants, including their credit scores, whether they have a history of making late payments, and what their debt situation is like. All these details are key indicators as to whether an applicant is likely to make timely rent payments, whether they can afford your property, and if they are at higher risk than average for being evicted.

Where Can Landlords Get a Tenant Credit Check?

To conduct tenant credit reporting, you’ll need some basic information about the applicant. This usually includes the person’s full name, Social Security number, date of birth, and former addresses. In addition, you’ll need the renter’s permission to run the check, which requires gaining written consent. You must confirm that you’ll only be using the report for the rental application and you may need to verify that you are a landlord, depending on the service you use.

There are several places to check credit report history, the three main credit bureaus are:

• TransUnion, through the SmartMove tenant screening program.
• Equifax, which has a specific resident screening service.
• Experian, again by using the service for landlords.

You can easily manage your rental applications and run a full tenant screening report through the Landlord Studio software. This report includes a full tenant credit check, a rental and eviction history check, as well as background and criminal checks.

As a landlord, you cannot use credit check tools designed for consumers to check their own scores.

What Do the Different Credit Scores Mean?

There are two types of credit scores. Most landlords use the FICO score, but you can use VantageScore if you prefer. Both range from 300 to 850. The higher a tenant’s credit score, the lower the risk for you.

It’s important to know what exactly a particular score means and to think about what threshold you’ll want from applicants for your property. There may be no need to find tenants with exceptional credit scores, but you’ll likely want at least a “good” score.

800 to 850: Excellent

This is the absolute best credit score. People with a score in this range gain the lowest interest rates on loans, credit cards, and lines of credit because they have proven to be responsible with their finances.

The risk of someone with a score in this range missing a payment is low, as they have no late payments in recent history. These consumers find an approval for credit easy and are the most desirable tenants in terms of credit history. Around one-fifth of people have a score in this range.

700 to 799: Very Good

You’ve also found a potentially great tenant if an applicant has a credit score between 700 and 799. People with scores in this range have a history of being financially responsible in most of their monetary decisions, including managing credit. They will have made most payments on time and their credit card balances will be a low percentage of their total credit limits. Since one-quarter of people are rated “very good” in terms of credit, it may not be difficult to find tenants with a score of at least 700 if you have a desirable property.

650 to 699: Good

It’s best to find tenants with scores no lower than what is considered “good”. A fifth of people fall into this category. Consumers with scores between 650 and 699 can often receive competitive interest rates, although they are less slightly desirable as clients and tenants than those with a score of at least 700. Before accepting a tenant with a score in this range, you’ll need to use other aspects of the renter’s credit report to determine the risk of missed payments.

600 to 649: Fair

Credit scores in the “fair” range may be deemed slightly risky. Consumers with a score between 600 and 649 tend to have faced some issues in the past (which you’ll notice when assessing their credit history), although nothing major. Accepting an applicant will put you at a high chance of missed rent payments. You will want to assess additional factors before accepting a tenant with a credit score in this range to better understand why it’s lower and the associated risk of renting to this tenant. The good news is only about a tenth of people are in this range, meaning you should be able to find applicants with higher scores, especially if your property is in an area with a reasonably high demand for housing.

Below 600: Poor

A final quarter of people have scored in the lowest range: from 599 to 300. Consumers often receive such scores if they have defaulted multiple times on various credit products from different lenders. Alternatively, a person will have a poor score for seven years after Chapter 13 bankruptcy and for 10 years after Chapter 11 bankruptcy. There is a significant risk of facing late or missed payments if you accept a tenant with a credit score of less than 600.

What Other Information Do Landlords Look For in a Tenant Credit Report?

Beyond the credit rating, there are several things to look for in a credit report.

Overview of the Report

Start with an overview of the renter’s credit report. This will show the reason behind the credit score and give you a better idea of if the applicant is likely to fit your idea of a perfect tenant.

For example, many people lost their jobs at the start of the pandemic and their credit may have taken a hit. Applicants who have since started to recover their credit score, including by finding a stable job, are less of cause for concern.

In addition, check for any negative signs that indicate a history of financial problems. This includes previous car repossessions, garnishments, liens, and accounts in collection.

Credit Usage

The next stage in a credit check for landlords should be to examine how much the applicant has been using credit. This appears under credit utilization. It represents the amount of credit owed compared to the person’s credit limit and appears as a percentage. When this rate is low, it implies that the applicant is not overspending — although it is important to note that credit utilization only includes revolving credit and not installment loans, such as a car loan.

Both FICO and VantageScore recommend a credit utilization rate of less than 30 percent. Therefore, applicants with a higher rate than this are likely to also have worse credit scores. However, there is sometimes a delay in credit utilization impacting credit scores, since credit card companies don’t always update balance information with credit reporting agencies immediately. It’s for this reason that checking credit usage gives you a better overall picture of applicants than considering credit scores alone.

Previous Rental Payments History

You are able to see an applicant’s payment history if a previous landlord reported this information to a credit bureau. Landlords are likely to do this if a tenant owes them rent, sent a bad check, or has any other kind of outstanding debt.

Alternatively, you may find a positive rental payments history for a renter. Tenants can ask their landlord to submit a history to strengthen their applications, especially if they have no missed payments for the last 25 months. Renters can also enroll in rent-paying services for free to ensure credit bureaus receive this information in the case a landlord is unwilling to submit it.

Overall Debt

Debt now affects a huge proportion of the population and it has become an even larger problem since the start of the pandemic. It’s important to know what debt a tenant has to see if the applicant will be able to afford rent payments in addition to other financial obligations.

Beyond looking at the total, consider what kind of debt the applicant has. This will tell you if an applicant is more likely to be financially irresponsible or if the renter has accumulated reasonable debt. For example, ongoing credit card debt may be a red flag, whereas debt attributed to student loans tends to be normal even a couple of decades after a person has graduated.

Any Late Payments

It’s crucial for landlords to know if an applicant has a history of making late payments since you want your tenant to pay on time every month. A single or just a couple of late payments in the past — whether on a credit card, utility bill, or loan repayment — may have a reasonable explanation.

However, if an applicant’s credit history shows a pattern of late payments, there may be a high risk that you’ll be waiting for rent payments for some months. This can have a major impact on your own financial situation. Plus, if the tenant is responsible for paying utilities, the last thing you want is for a service to be cut off due to a late payment.

Account History Check

A typical renter credit report will cover seven to 10 years. This gives you a useful overview of an applicant’s long-term financial history.

One thing to look out for in an account history check is bankruptcy status. A bankruptcy record provides you with details including the accounts and companies involved. You may like to consider an applicant who has a discharged bankruptcy, provided all other aspects of the credit check are acceptable. However, someone who has a pending bankruptcy is a high risk, as the applicant could be relieved of all financial obligations, which includes any rental payments still due.

Income Verification

Finally, you’ll need to verify that the applicant has sufficient income to afford rent on top of other commitments. There are several ways to verify income, including tax returns (which you can also use to run the tenant credit report), pay stubs, or a letter from an employer. For self-employed tenants, other options include a profit & loss statement or bank statements.

One important way to use income is to calculate the applicant’s rent-to-income ratio. You do this by dividing the cost of rent by the renter’s gross income. The rule of thumb most landlords use is that rent should be no more than 30 percent of income.

It’s crucial to run a tenant credit check to gain a clear picture of an applicant’s financial situation and history, as this is the best indication of how a tenant is likely to behave in the future. Make sure to check all the above criteria to consider the credit report from all angles so that you can make the best decision as fairly as possible.

A better option than running a credit check through one of the credit bureaus is to use tenant-screening software. With Landlord Studio, you’ll receive a rental history and background check in addition to a credit report, all for a single fee. You can pass on the cost to the renter as part of the application or pay it yourself.

‍