Credit reports are a significant part of the tenant screening process as a person’s credit is a direct correlation to their trustworthiness to pay back their debts. In this second installment of our three-part Tenant Screening series, we’ll be focusing on this portion of application screening in PA. Understanding an applicant’s financial history is critical when determining whether you’ll lease your property to the person or not, as a thorough investigation can help you reduce the likelihood of unpaid rent. Let’s take a look.
Credit Report vs. Credit Score
It is often misunderstood that a credit report and a credit score are the same things, but they each provide different information. A credit report is a complete record of a person’s credit history and can serve as a list of credit references. These reports are compiled by three reporting bureaus: Experian, Equifax, and TransUnion, and each bureau maintains its own report. Because the information can differ between each bureau’s reports, it may be helpful to pull reports from more than one bureau.
In contrast, a credit score is a numerical score given by FICO, VantageScore, or individual banks with their own proprietary scoring system. The information from a person’s credit report is used to create the score; a computer algorithm is typically responsible for measuring the person’s credit risk based on that information. Credit scores are handy for a quick look at a person’s credit history. In most cases, someone with a high credit score is unlikely to have a poor credit history. On the other hand, someone with a low score may have explainable events to investigate.
What to Look for On Each Report
When checking a prospective tenant’s credit score, we recommend a score no lower than 600, no matter what the explanation for the low score may be. For units with higher rent amounts, it may be prudent only to accept those with higher credit scores as their obligations will be more challenging to meet, and trustworthiness is essential.
When reading through a credit report, the most important thing to look for is any recent accounts in collections. When a person has a statement sent to collections, it means he or she has failed to pay that bill for an extended time and after repeated attempts to collect the debt from the original creditor. Eventually, the creditor gives up and enlists the help of a collection agency to recoup lost payments. If a person cannot demonstrate the responsibility to pay their debts, they may not be a good candidate for paying their rent, either.
We also recommend that no landlord accept tenants who owe any utility companies. That’s because utility companies may not turn on new service for anyone with a past balance until that balance has been paid in full. Plus, a tenant who cannot pay for their most essential needs may not be trustworthy to pay their rent. If a tenant claims to have paid old utility debts, be sure to require proof of such payments. It’s also advisable to deny any applicants with unpaid rent or fees due to a previous landlord as you wouldn’t want to end up in the same position as their old landlord.
Weighing Credit Against Other Factors
A rental screening application form collects a lot of information from possible tenants, including income, rental history, and other financial information. Finding the perfect applicant is fairly rare, so landlords should be diligent when looking through an applicant’s current financial situation and credit history. For example, a person can be overly qualified in terms of income, but a poor credit history or low credit score might reveal that he or she is not using that income to pay their bills.
There may be occasions when exceptions may be acceptable. For example, if a person has an old collection that has been paid in full and no other credit issues since that date—and all other credit and income verification looks good—it may be an acceptable risk to accept that tenant. If minor problems or questions have you on the fence as to whether to accept the application or not, consider requiring an additional deposit or prepayment of rent to reduce your risk.
PA Rental Applications
Screening tenants to live in your rental home is not an easy task. If you’re inexperienced with credit reports and scores and weighing the information contained in these reports, you may not be making the best tenant decisions. Instead, protect your investment and your income by engaging with a superior property management company. BMG Philadelphia knows what it takes to be an excellent tenant and has seen all the red flags that should send a rental application directly to the “rejected” pile. It’s impossible to prevent tenants from defaulting on their rent. However, with a little due diligence and the help of a professional, you can reduce that risk by having strict standards for occupancy in your PA rental properties.