As a landlord, you probably know that a credit check is a common part of any rental application. But do you need to check your rental applicant’s credit? And what should you be looking for in their credit report? Let’s take a look at how to review your prospective tenant’s credit report.
1. Do I need to do a credit check on prospective tenants?
As a landlord, thoroughly screening prospective tenants is one of the best ways to protect your investment. Before you invite someone to live in your home, you need to be able to answer three questions:
- Is this application complete and accurate?
- Does this person have a history of making payments on time?
- Is this person likely to continue using their money responsibly. In other words, how likely is this person to be delinquent on his/her rent payments a year from now when you’re reviewing your rental property analytics?
A credit report is a useful tool that helps you answer these questions by giving you an objective overview of your applicant’s behaviors when it comes to borrowing money. While a credit report alone isn’t enough to make a fully informed decision about a rental application, it can help you gain confidence in the application’s veracity and spot red flags that might not be otherwise apparent.
2. What is a credit report?
There are three major credit bureaus that track individuals’ credit history: Equifax, Experian, and TransUnion. These bureaus collect information from lenders, credit card companies, landlords and other sources about each person’s borrowing habits. These institutions report everything related to credit, from applications to accounts opened, payments made and missed, collections, and bankruptcies.
When someone applies to rent your property, you can request a report containing all of this information. The report will give you an independently verified view of how your applicant behaves when it comes to money, which you can use to judge whether or not you should accept their application and welcome them to rent your home.
3. How do I request a rental applicant’s credit report?
Since a credit report can be easily forged, it’s best to request reports from the bureaus themselves or a tenant screening company that can securely deliver them directly to you. TransUnion’s SmartMove is one example of a service that lets you create a landlord account and request a credit report with just a few clicks. The service takes care of getting the applicant’s consent, collecting payment from them, and securely sends you a detailed report within a few minutes.
4. How do I review a rental applicant’s credit report?
Once you receive your applicant’s credit report, review each section carefully and pay close attention to specific details:
Compare the information provided in this section to what was provided on your prospective tenant’s application and cross reference it with other screening reports. Ensure the applicant’s name, birthdate, and social security number match exactly what they provided you. Double check their past addresses match what they provided and ensure you have a reference for each. Confirm that the phone numbers included on the credit report match the contact information you have. And verify there are no discrepancies in their employment history.
A person’s credit score is a computed judgment of their current creditworthiness ranging from 300 to 900. Each bureau measures differently but, in general, a credit score over 600 is considered ‘fair’, a score over 680 is considered ‘good’, and a score over 780 is considered ‘excellent’.
Don’t get too caught up in your applicant’s credit score as long as it falls into the ‘good’ category or better. The average credit score is 698 according to Equifax, and lenders typically offer their best rates and products to anyone with a credit score over 720.
The public records section includes public bankruptcy records and may also specify other records like liens and child support. Public records other than bankruptcy usually aren’t cause for concern, but obligations listed in this section are likely to be prioritized over any obligations to you in case the tenant declares bankruptcy.
This section summarizes the credit accounts held by the applicant. Make sure that all the accounts listed in the credit report have also been specified on the application form. While missing information isn’t necessarily a sign of malevolence, it can cloud your ability to judge an application. Be sure to ask questions if something seems off.
The account information section will also specify a rating for each account describing the payment status. Ideally, your applicant will be current on all their accounts, meaning there are no late payments and they haven’t defaulted on any loans.
Accounts with adverse information
If your applicant has fallen behind on any payments or has an account that has been sent to collections, the details will appear in this section. Everyone makes mistakes sometimes, so be judicious when reviewing these accounts. A small credit card payment that’s 30 days overdue can probably be overlooked if the applicant’s other accounts are all up to date. A large personal loan in collections, by contrast, is a big red flag.
This section lists all of your applicant’s credit accounts that are paid up to date. Double check the information provided in the credit report matches the information provided on the application form and nothing is missing.
Even if the credit report list in account is satisfactory, this section can still uncover some red flags. If the applicant has opened multiple credit accounts within the past year, they may be living beyond their means and using credit to make up for the shortfall.
Also take a close look at the applicant’s utilization ratio on revolving accounts like credit cards and lines of credit. A high utilization ratio (meaning the applicant is using a significant percentage of their credit limit across all accounts) is a sign they could be struggling to pay off debt and could have trouble paying rent in the future.
If your applicant has fallen so far behind on any of their obligations that a collections agency has become involved, it will appear in this section. It may not be cause for concern if your applicant has a single collections record from several years ago that was paid in full shortly after it was opened, but err on the side of caution.
This section shows your applicant’s past credit applications, which can help you get a more complete picture of any concerns you may have. Multiple inquiries within a short time frame can be a sign of poor money management, or just a sign of comparison shopping. The bureaus’ algorithms are good at spotting this, so use your applicant’s credit score to gut check any concerns.
Companies will sometimes request a credit report when making a promotional offer like a pre-approved credit card. These inquiries have little to do with your applicant’s behavior and can safely be ignored.
Account review inquiries
Whenever someone requests someone’s credit report with the intention of reviewing their account, the request will be noted in this section. These inquiries can be used by underwriters, employers, and landlords like yourself. Account reviews can happen for many different reasons and aren’t a reliable indicator of whether you should accept an application.
If your applicant has submitted a consumer statement to the credit bureau, it will appear here. A consumer statement may help you understand your applicant’s financial history.
Learn more about what to look for in a credit report in our article, 5 Important Things Landlords Should Check on a Credit Report.
5. How can I use a credit report to make a decision about a rental application?
A credit report on its own doesn’t provide enough information to approve an application. Rather, a credit report can be used to help answer a few important questions about your applicant:
Is this person providing me complete and accurate information?
A credit report is a useful tool in verifying someone’s identity and the information they’ve provided to you. If the credit report shows different details from the application, it can be a red flag that your applicant is trying to hide something or show you an incomplete picture of their personal or financial information.
Does this person have a history of using credit responsibly?
A credit report can show whether your applicant has been responsible with their money in the past. Key indicators of responsibility include payment status, collections, and bankruptcies. Everyone makes mistakes from time to time, but a pattern of poor money management shouldn’t be ignored.
Is this person likely to continue using credit responsibly?
A history of good credit use doesn’t guarantee a future of on-time rent payments. A credit report can help you spot behaviors or patterns that could lead to problems in the future. Signals of potential trouble on the horizon include high credit utilization, a high debt-to-income ratio, and multiple new credit accounts.
6. What other tools can I use to review a rental application?
In addition to a credit report, there are a few other tools you can use to review a rental application.
A criminal background report provides a summary of your applicant’s criminal convictions, which can be particularly useful for tenant screening. Fair housing laws don’t specify people with criminal records as a protected class, but the Department of Housing and Urban Development has published guidance advising that blanket policies against people with criminal records contribute to systemic racism and applicants with convictions should be considered on a case-by-case basis.
An eviction history report uses court records to provide information on whether your applicant has been evicted from rental housing in the past. There are many valid reasons for eviction that don’t reflect on the tenant, but any history of eviction for criminal activity, lease violations, or nonpayment of rent is cause for concern.
You can access both of these reports along with a credit report using TransUnion’s SmartMove service.
Final thoughts: how to review a rental applicant’s credit report
It’s far easier to screen out a bad applicant than it is to evict a troublesome tenant. A credit report is a useful tool in judging an applicant’s likelihood to be a good tenant and pay the rent on time. Use your applicant’s credit report to verify whether they’re giving you complete and accurate information, whether they have a history of making payments on time, and whether there are any red flags that could point to financial trouble in the future.
Use a tenant credit report to look for three major indicators of whether your applicant is likely to be a good tenant: They have provided you with complete and accurate personal and financial information; they have a history of using credit responsibly and making payments on time; and they are not using credit in a way that indicates they may be living beyond their means.
There are a number of online services that make it easy to request an applicant's credit report. For example, SmartMove takes care of getting the required consent and lets you pass on the cost of pulling their credit report to your applicant. Do not accept a credit report directly from your applicant as they can be easily falsified.
Compare the information provided in the application with the information provided in the credit report. Look for any signs that your applicant has been dishonest in their application, has mismanaged their money in the past, or has shown behaviors that could be a sign of money trouble ahead.