The importance of resident credit checks is hard to overstate. They allow you to protect your rental, identify red flags in applications, and a lot more.
Why do some landlords decide to skip these checks? There are a few potential reasons, but the main one is to save time. When you’re going through a bunch of resident applications in a week, it can be tempting to start cutting corners.
Need some convincing that credit checks are worth it? Read on to learn why you should always run a credit check for resident screening and how to do it right!
Why Credit Checks Are Important
First things first: a resident’s credit history is more than a number. It’s a financial snapshot that helps you predict their rental payment behavior.
How does this work? For starters, the credit history report can show a variety of interesting patterns that correlate with a resident’s reliability. Here are the key factors that shape a resident’s credit profile:
- Payment history (35% of score): Shows if they pay bills on time
- Credit utilization (30%): Shows their financial stress levels
- Credit mix (20%): Indicates how they use their credit
- Length of credit history (15%): Shows their long-term financial habits
Every landlord will have different standards for what a bad credit history might entail. However, one thing that’s true for all landlords is that payment issues are a top concern. Proper screening is essential for putting those worries to rest.
What Is a Good Credit Score for Residents?
A credit score is a key part of a resident’s financial background. The definition of a good score varies by location, but here are some general pointers:
- 800-850 (exceptional): Highest reliability, best rental terms
- 740-799 (very good): Favorable lease, low deposits
- 670-739 (good): National rental average
- 650-669 (acceptable): May need a higher deposit or references
- 580-649 (fair): May require a large deposit or a cosigner
- 300-579 (poor): High-risk
A low credit score isn’t always a dealbreaker. Imagine an applicant with a 640 score and stable employment for five or more years. Someone like that may be less risky than an applicant with a 700 score who changes jobs frequently.
What Are Red Flags on Resident Credit Reports?
Reading a credit report for landlords doesn’t only involve looking at the score. There are a few other potential red flags you’ll want to consider:
- Multiple accounts in collections
- High debt-to-income ratio (over 50%)
- Recent bankruptcies
- Patterns of late payments
- Excessive credit inquiries
In general, none of these issues should warrant immediate rejection. That said, they may play a big role in determining a resident’s trustworthiness. Paying attention to these red flags can have lasting ramifications for your property.
How to Run a Credit Check Correctly
Running a credit check incorrectly is barely better than not running it at all. Here’s a quick guide for what this part of a resident screening process should look like.
1. Get Authorization
Before checking a potential resident’s credit, you’ll need their written authorization. This is more than a courtesy; it’s mandated by the Fair Credit Reporting Act (FCRA). If an applicant refuses to consent, you can refuse to rent to them.
The best way to get written consent is to include this clause in your rental application form. You’ll need to clearly explain how this process works and what the applicant’s information will be used for.
2. Choose a Credit Check Service
Once you get the approval, you’ll need to decide which service to use for credit verification. You can opt for an online resident screening service or one of the big three leading credit agencies, such as TransUnion.
Keep in mind that the three credit bureaus collect the same data, but process it differently. As a result, they’ll often have different information. This means you may need to run checks from multiple bureaus.
3. Submit Resident Information
Some credit check services require the resident to complete an online screening to authorize the check themselves. More often than not, though, you’ll simply give the agency the necessary information yourself. This includes:
- The resident’s legal name
- Social Security Number or ITIN
- Address history
4. Review the Report
Once you receive the report, you’ll need to review it. You’ll get plenty of relevant information, from the applicant’s credit score to their payment history. Before making the decision, however, you’ll also want to look at their:
- Rental history
- Proof of income
- Employment verification
- Employer references
Frequently Asked Questions (FAQ)
Does a Credit Check Affect an Applicant’s Credit Score?
Yes, but only hard inquiries. These checks occur when you apply for new credit, such as a credit card or a mortgage. Rental application checks are soft inquiries, which means they’ll have no impact on an applicant’s credit score.
What if the Applicant Has No Credit History?
Having no credit history at all may seem like a red flag. In some cases, it will mean that the applicant is giving you false information. That said, there are several valid reasons why they may have no history, such as:
- They’re young and haven’t built one yet
- They’ve moved to the country recently
- They’re wary of financial institutions
How Much Does a Credit Check Cost?
Credit checks usually cost $25-$45 per applicant. A full screening package, including criminal checks, will set you back $35-$65. If this seems like a big expense, keep in mind that a single bad resident will cost you much more.
Does a Poor Credit Score Tell the Whole Story?
No, a poor score shouldn’t spell automatic disqualification. For instance, you may get a great applicant whose credit score is affected by an outstanding medical bill. This is why credit checks should only be one part of your screening process.
Credit Check for Resident Screening Made Easy
Running a credit check for resident screening purposes can tell you a lot about your applicants. Most of all, it reveals whether they have stable financial habits. Skipping this check could cost you thousands in eviction losses.
At Reedy & Company, we know that running credit checks takes a lot of time and effort. We can take this task off your hands! With 40 years of experience and 3,500 managed properties, we know what it takes to screen residents efficiently!
Contact us right here for more information on our property management services in Memphis, TN!
