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Credit Checks for Renters

September 21, 2022

Advising Renters on Credit Checks

Throughout the last 5 years at least, tenant credit checks have become a key tenant rentability indicator for landlords. They’re one component of a tenant screening process to reduce exposure to unreliable and unfit renters.

Credit screenings in particular help to establish the applicant’s ability and willingness to pay their rent on time each month. Employment and financial trouble can lead to unpaid rent and expensive evictions. For landlords, avoiding irresponsible renters is a smart way to avoid harmful cash flow issues and high legal costs.

The rules around credit checks as used in employment, insurance, and rental applications are different in Australia, UK, Germany, US and Canada.

We have tips below which in general can help you communicate better to your tenants about keeping their financial record clean and credit rating as high as possible.

Using Credit Ratings in the Rental Industry

The move to use credit ratings and records more assiduously may have come from a variety of sources:

  • rising concern that only renters with strong financial skills will avoid rent payment problems in the coming high rent period.
  • Realtors managing house or condo rental units for sale would rather rent to potential future buyers who would then represent a nice commission check rather than renting to long term renters who would never buy a house. Prospective home buyers are very focused on credit ratings.
  • Landlords who seek to know how well the applicants handle their finances and whether they will default on rent if they lose their job, although there’s little evidence to suggest those with low to mid ratings are any more likely to default on their rent.
  • Landlords looking to use it as a tiebreaker between numerous, equally qualified renter applicants.

While a credit rating isn’t the primary indicator of a prospective tenant’s suitability to rent to, it seems to have risen greatly in the ranking hierarchy. Today, more people must rent a home, including former homeowners who may now have lower credit ratings than expected.

What is a Tenant Credit Check?

A credit check is a score (numeric calculation of your credit worthiness at any given point in time) provided by a few major credit rating agencies.

Several companies conduct credit checks and build ratings including Equifax and TransUnion. They typically generate a rating number between 300 and 900. Scores above 700 are considered a good credit score. Those with rating from 600 and 750 is about the average for most consumers. A rating below 600, is considered more risky for credit issuing companies, and below 500 can mean the individual can’t rent an apartment.

Renters Insurance a Better Choice

Landlords of course, aren’t offering credit which can make the credit rating a suspicious type of assessment for apartment rentals. More important today would be renters insurance just in case accidents do happen. If damage to the rental property occurs however, and it is the tenant’s fault, and renters insurance won’t cover it, then the tenant is liable for the full amount to repair the damage.

If such property damage vulnerability exists, then a credit rating may be the only way a landlord can be reassured the tenant can handle the cost of repair.

Tenants can buy a credit report from TransUnion or Equifax for about $20.

Some landlords expect the renter applicant to supply a valid credit report with their rental application. This is  preferable to running a credit check at their own expense (or for an applicant fee) via their landlord software.

Credit rating agencies use their own criteria and rating algorithms.  Tenants unfortunately can’t be sure which credit reporting agency the landlord uses, so tenants should discover which of these reporting firms offers a better rating for them and get the credit rating beforehand to send with the rental application.

Landlords examine the Apartment credit checks for assess the following:

  • bill payment habits and paying on time (35% of your credit rating)
  • any late payments or defaults
  • any bankruptcies
  • the total amount of your current debt load (30% affect on rating) which potentially weighs on tenant’s ability to pay their rent

When a landlord sees a poor credit rating with a larger personal debt, it casts doubt on the renter’s capacity to pay the rent consistently. It’s up to the landlord as to whether they’re willing to risk renting to that particular tenant.

At the time of checking credit, the landlord can’t help the applicant much. However, they can advise on their website to take action to improve and maintain their credit score, to improve their chances of renting in future. The effort to improve one’s credit rating might be noted by some landlords.

It may be wise to mention the credit check in your rental advertisement ad to avoid wasting everyone’s time, especially if you’re expecting a tenant with an A+ 700 credit rating.

17 Good Ways for Tenants to Improve Rent Worthiness

  1. pay all bills and credit cards before due dates, don’t take chances on a late report
  2. show how you’ve paid your utility bills on time and present them in your rental application
  3. reduce your total debt including credit cards and loans
  4. eliminate high interest credit cards by applying for loan to use a monthly payment plan
  5. compare your debt to income ratio and improve it each month
  6. keep a credit card if possible to aid credit scores and have a financial backup to pay rent
  7. review your credit report and scan for errors and ensure they’re using as much of your credit history as possible
  8. dispute errors on your report — there are companies that can make false marks on your credit record (cable/internet companies)
  9. avoid high credit card limits, which may invite misuse
  10. don’t go over your credit card limit or bank account limit (NSF) even if you have overdraft protection
  11. have your monthly rent payment reported to credit bureaus
  12. don’t apply to several credit services since this lowers your score
  13. rebuild your credit using store accounts and high interest credit cards
  14. never pay the minimum due, always more than that
  15. pay debts as fast as possible
  16. pay off an account, and get it to zero to reduce a debt source
  17. reduce the worst debts such as taxes, mortgages, helocs, student loans and credit cards

Renters might want to subscribe to TransUnion’s CreditCompass service to get guidance on rebuilding their credit rating.

Rising Demand for No Credit Check Rentals

Some rental listing websites offer a category of rentals called no credit check apartments. These might generate some rental leads for renters finding it difficult in this ultralow vacancy environment.

No Credit Check rentals are a diversion from the usual process. For this type, credit checks would be waved for those with no credit history (e.g., students).  Tenants need to be wary of no credit check offerings because of the possibility of a rental scam. There’s little incentive for landlords to forego a credit check, and a higher priced condo or house would certainly require a financial check of applicants.

Other options for renters with poor credit ratings are to offer higher rent to a prospective landlord or pay 6 months rent up front. This may be enough to win over a doubtful landlord who can see you have been a reliable tenant.

Renters should provide the names and numbers of all former landlords to assert proof of making rent payments each month.

 

Tenants who make rent their first priority are a landlord’s real goal

Ensure you agree to buy and maintain renters insurance as this does reduce the landlord’s financial risk.

You may be able to talk down the credit rating issue with some landlords. A tenant’s credit rating in 3 years may look very different than it does now, so credit ratings shouldn’t be used if they’re only being used to discriminate.  The best approach for landlords is to attract good renters strategically, review rent payment history and employment record, and ask good questions to draw a better picture of applicants.

 

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