Many landlords are nervous asking for a tenant’s credit score because they’re unsure of how to read a tenant credit report.
How is a credit score rated?
Although the two credit bureaus have separate algorithms for determining credit worthiness, basically, they both rely on five factors to assign a credit score.
- 35% payment history
- 30% utilization ratio
- 15% credit history
- 10% public records
- 20% inquiries
Based on a tenant’s financial history, credit bureaus assign a three-digit number (called a FICO score) on scales ranging from 300 to 900, depending on who produces the score. The higher the three-digit number, the better your tenant’s score. The higher score, the more likely the tenant is to pay their loans/bills on time and the more likely they are to receive loan approvals and lower interest rates.
The credit check shows a wealth of valuable information for landlords.
I’ll explore the five main sections of the credit report below in the sample Equifax Credit Score.
This credit check is a snapshot of the tenant’s credit worthiness as of March 3, 2012. The score is in the upper left corner and is on the high range at 750 – a very good rating.
The bottom line is a summary assessment of the lending risk that may be impacting the credit check for tenants.
Identifying Credit Check for Tenants Information
The identifying information section is useful information for landlords to cross reference against the tenant application and includes the following:
- Alias or AKA (Also Known As)
- Current and previous addresses
- Social Insurance Number
- Telephone number
- Date of birth
- Current and previous employers
On the bottom of the Identifying Information are the Inquiries which include:
- Regular inquiries: credit grantors and other authorized parties who have requested a tenant’s credit information for a credit-related purpose. These are considered “hard” inquiries and may affect the tenant’s credit rating.
- Account review inquiries: credit grantors with whom the tenant has an existing relationship and who have requested a periodic review of a consumer’s credit information such as loans, mortgages, etc. These are considered “hard” inquiries and may affect the tenant’s credit rating.
- Other inquiries: authorized parties who have requested consumer credit information for a non-credit related purpose (i.e., apartment rental, employment, insurance, etc.). These inquiries are considered “soft” and do not affect the tenant’s credit score.
The public records section includes bankruptcies, judgments, foreclosure, and collections and are only 10% of the credit score. Except for bankruptcies (which should be treated individually), the rest are red flags for landlords. If the potential tenant has a history of not paying loans on time or not paying at all, stay away from them.
In Canada, most provinces keep bankruptcies on record for six–seven years except for PEI, which keeps bankruptcies on record for 10 years. Two bankruptcies are kept on record for 14 years.
How can tenants improve their credit score?
There are six factors involved in improving a credit score.
- The best way to improve a credit score is to pay bills on time every month. Even if it’s just the minimum payment – pay on time. Rent can also now be reported to credit bureaus through Frontlobby. Paying rent on time every month raises the credit score.
- If the tenant is young and needs a credit history, they can start building a credit rating by applying for a credit card with a small limit, using it every month and paying the balance on time every month. The longer a good credit history – the better the credit rating
- Mix of credit. Creditors like to see a variety of credit such as a line of credit, mortgage, auto loan, and credit cards that demonstrate a well-rounded lifestyle.
- Utilized vs. Available – credit lenders like to see all credit available is not used and that there’s still a buffer zone.
- Keep old accounts open; even if an old credit card is not used, unused credit is a positive factor in the overall credit picture.
- Check credit records regularly – with the increase in cyber security; it’s good practice to make sure nothing fraudulent has worked its way onto a credit report. Tenants can stay on top of this by running a free credit report.
With a little guidance, reading a credit check for tenants is a breeze.
Do you have a tenant credit score story you’d like to share? I’d love to hear about it [email protected].
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