Credit Check

Credit Check in Tenant Screening

In property management a credit check is used as part of the tenant screening process. It allows landlords to assess a prospective tenant’s financial responsibility based on an applicant’s credit history and previous financial behavior. Ultimately landlords are looking for whether a tenant is able and likely to pay rent on time every month and fulfill their lease obligations.

When combined with other screening tools like background and eviction checks, a credit report offers valuable insights that can help landlords distinguish a reliable tenant from one who may pose a risk - so they can have complete confidence in their final tenant decision.

Importance of a Tenant Credit Check

Selecting the right tenant can mean the difference between a stress-free rental experience and constant issues with late payments or even eviction. A tenant's credit report serves as a window into their financial habits and can help you predict their ability to meet rental obligations.

The credit report reveals an applicant’s credit score, payment history, current debts, and more, allowing you to gauge whether they can afford your property and if they're likely to make timely payments.

Someone with a strong credit score and no history of late payments would appear to be more financially responsible than a rental applicant with frequent late payments or high levels of debt. By assessing an applicant's current finances in this way landlords can reduce risk when selecting new tenants.

How a Tenant Credit Check Works

To run a tenant credit check, landlords typically need certain information from the applicant, such as their full name, Social Security number, and date of birth. Additionally, you’ll need the tenant’s written consent, as required by the Fair Credit Reporting Act (FCRA), to ensure privacy and legal compliance.

This is simplified if landlords choose to use a tenant screening service like Landlord Studio. With Landlord Studio all you need is an email address to get started as we will collect the important details such as SSN and written consent from the tenant as part of the flow.

The credit report typically includes:

1. Credit Score: A numerical representation of the tenant’s creditworthiness, ranging from 300 to 850, with higher scores indicating better financial reliability.
2. Payment History: Information on whether the applicant has a history of making payments on time or has defaulted on loans or other financial commitments.
3. Current Debt: Details on the tenant’s outstanding debts, such as credit cards, loans, or other financial obligations.
4. Credit Utilization: A measure of how much of their available credit the tenant is currently using, which can indicate whether they manage their finances responsibly.
5. Public Records: Any legal judgments, bankruptcies, or liens that may raise concerns about the tenant's financial stability.

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What to Look For in a Credit Report

When reviewing a tenant’s credit report, there are several key factors that landlords should focus on:

1. Credit Score: Most landlords set a minimum acceptable credit score threshold. Generally, a score of 650 or higher indicates that the tenant is financially responsible, though many landlords prefer scores of 700 or above. Lower scores may suggest a higher risk of late payments or other financial difficulties. Below is a rough guideline of how you might bracket different credit scores.
   • 800-850 (Excellent): Tenants in this range are highly reliable, with no history of missed payments. These tenants are the least likely to default on rent.
   • 700-799 (Very Good): Financially responsible with a strong history of on-time payments. These tenants are generally low risk.
   • 650-699 (Good): Indicates responsible financial behavior, though there may be minor blemishes like occasional late payments.
   • 600-649 (Fair): Tenants in this range may have some financial challenges, such as higher debt levels or occasional missed payments.
   • Below 600 (Poor): These tenants pose a significant financial risk. They may have a history of defaults, late payments, or bankruptcies.
2. Payment History: Look for any patterns of late or missed payments, especially on rent or loans. Consistent late payments could indicate the tenant may struggle to meet rent deadlines.
3. Debt-to-Income Ratio: Evaluate how much debt the applicant has relative to their income. A high debt load could make it difficult for the tenant to afford rent in addition to their other financial obligations.
4. Public Records and Collections: If the tenant has any past bankruptcies, liens, or accounts in collections, this may suggest financial instability and increase the risk of non-payment.
5. Credit Utilization: Ideally, the tenant should be using less than 30% of their available credit. High credit utilization can negatively impact their credit score and may suggest that the tenant is financially overextended.

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Legal Requirements for Running a Tenant Credit Check

Before running a credit check, landlords must comply with legal regulations, primarily the FCRA. This law requires landlords to inform tenants of their intent to run a credit check and obtain their written consent. Additionally, if you reject a tenant based on information in their credit report, you are required to send an Adverse Action Notice, explaining the decision and providing details on how the tenant can access their report.

Some states have specific rules regarding tenant credit checks, including caps on how much landlords can charge applicants for screening fees.

Where to Get a Tenant Credit Check

Landlords can obtain credit checks through several services, including:

• TransUnion SmartMove: Provides a comprehensive tenant screening, including a credit report, background check, and eviction history.
• Experian and Equifax: Both offer rental screening services that include credit reporting.
• Landlord Studio: A landlord management tool that integrates tenant screening, including full credit checks, into its platform, streamlining the process for landlords.

How Much Do Tenant Credit Checks Cost?

The cost of a tenant credit check varies depending on the service used, typically ranging from $20 to $70. Landlords can often pass this cost onto the tenant, depending on state laws governing application fees.

When you run a tenant screening report with Landlord Studio you get a full credit report alongside an rental history and eviction check, background check, and ID verification. Running a report with Landlord Studio is super easy and cost $45 - $50.

1. Simply create your free Landlord Studio account.
2. Enter the tenants email address.
3. We'll then collect the tenants details like their SSN so you don't have to.
4. Once the tenant has filled out their details you'll get a notification. Simply log back in to review the full report.

Tenant Credit Check: Conclusion

A tenant credit check provides landlords with insights into an rental applicant’s financial history and their likelihood to make timely rent payments.

By thoroughly reviewing a tenant’s credit report, you can minimize the risks associated with renting out your property and increase your chances of securing a reliable, financially responsible tenant.