Is there a magic number for an acceptable credit score for tenants? Many landlords view the credit score as the most important factor in the tenant screening process. I certainly do. But understanding how to interpret the credit report sometimes leaves landlords needing clarification.
Lenders use credit scores to determine whether you will pay off the loan based on your spending/credit history, and a credit report shows you a picture of the tenant’s financial history. Based on their credit history, you can make an educated decision about the tenant’s creditworthiness and financial condition.
Why run a credit report?
Although you’re not lending the tenant money, you are loaning them the use of your property which is an asset worth hundreds of thousands of dollars.
Rent is a monthly bill, and if tenants are in the habit of paying their bills on time, typically, they’ll pay rent on time. If tenants don’t place a value on paying bills on time, rent is yet another bill they will either pay late or not at all.
What’s good, and what isn’t?
So, what’s an acceptable credit score for tenants?
FICO scores range from 100-900. The higher the score, the better the rating. Most Canadian credit bureaus recommend a minimum FICO score of 600. If tenants pay their bills on time every month and their debt load is manageable, a 600 FICO score is doable.
FICO scores also vary between credit bureaus. You could run the same tenant’s credit report with two different credit bureaus and have slightly different ratings simply because they each have a unique algorithm for determining scores.
Here are some common red flags to watch for on credit reports.
History of late payments
My experience has shown that no matter how much you like the potential tenant or how well they can convince you they’ve mended their ways, you don’t want them if they have a history of not paying bills on time.
I accepted a father/daughter duo who were polite and respectful; the daughter was attending high school, working two jobs, and was on the honour role. I was impressed that she was such a great kid and that her dad had raised such a great kid. He had terrible credit, though, which he admitted, but he said he always paid his rent. He only paid his rent on time once the year they rented from me. Every month I had to chase after him to pay. Every month was a different excuse. Eventually, he paid in full, but the first of the month always left a knot in my stomach. To this day, I have no idea why he could never pay his rent on time. He had a good job, went to work every day, was well-liked by his boss and colleagues. In the end, I asked him to leave at the end of his lease and found a tenant who paid on the first of every month, and five years later, he’s still with me.
Bankruptcy is an entirely different matter. Many good people have paid their bills religiously for years and have had circumstances happen that were out of their control; sickness, divorce, death of a family member, or job loss. I’ve seen many tenants whose ex-spouse left them a parting gift of bad credit. As long as they can produce evidence (bank statements, T4s, proof of employment) proving steady income and a history of getting back on track to improve their credit score, I believe they deserve a chance. But they must jump through the hoops to prove their worthiness, and the good ones always do.
No credit or inactive credit
Although this may sound like an odd issue, it isn’t. Young people moving out of the house for the first time, seniors who don’t believe in credit, or people whose spouses had credit in their names may not have established any credit history or may have inactive credit.
For young people with no credit, asking for a co-signer may be the best solution. For senior folks, a statement from a bank manager, accountant, or lawyer supplying a financial statement could provide you with proof of income or savings to prove they can afford to rent your property.
High income, bad credit
Just because a tenant makes a huge income, doesn’t mean they have an acceptable credit score. I’ve seen tenants who were recent graduates, in their first job, applying to rent a bachelor apartment who had much higher credit scores than executives making 650K a year. A credit score shows how they manage their money, and that varies greatly from person to person.
Inconsistent information on addresses or employment
The information on your potential tenant’s application should closely match
(within reason) the employment and residence history on the credit report. I mention within reason because it’s difficult to remember or access an address from five years ago. However, a two- or three-year history should be reasonably easy for potential tenants to remember or access. If more than one address or employer differs, that’s a red flag, and there’s a reason they’re not telling you the truth.
How to run a tenant credit report?
Once you’ve entered the information into the report, you’ll receive the credit report in minutes.
What factors influence a credit score?
In a nutshell, credit scores are impacted by; late payments, missed payments, credit usage, credit history, and the number of credit hits.
- Late payments and missed payments cause a huge hit to a credit score.
- If your tenant has maxed out their $50,000 limit, it can significantly impact their credit score.
- The average amount of your tenant’s credit accounts, how long have they have had credit cards/loan accounts or if they’ve added a new account all factor into the equation. The longer the credit history, the better the score.
- If your tenant applied for a cell phone account, went looking for a used car, and applied for three separate apartments within a month and everyone ran a credit report, multiple and frequent credit inquiries drop their credit rating significantly.
In just a few minutes it takes to run a credit report, you’ll have the potential tenant’s credit score. The report will show you if the credit score is acceptable and will give you access to the information you need to decide if they are a good fit for your property based on their financial history, spending habits, and payment habits.
What’s an acceptable credit score? 600. Stick to your minimum standard of an acceptable credit score and watch out for red flags. Good tenants = a good business. Bad tenants = a bad business.
What is your opinion on an acceptable credit score? I’d love to hear about it.
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