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Why Tenant Credit Checks are Vital on Rental Applications

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Scott Gibson
Scott Gibson Published : April 19, 2021

Tenant credit checks are an essential part of screening potential tenants. It would be best to have a section on your rental application whereby the applicant authorizes you to run a credit check. Regardless of how amazing a potential tenant may seem, running the correct credit checks is essential to prevent problems later.

Checking a tenant’s credit history helps you determine if they can afford the apartment or not. More importantly, the credit report lets you gauge their attitude toward paying bills on time and clearing debt — essential to avoid future headaches with your tenant. Despite the small cost, credit checks are a vital part of a rental application. 

One of the problems that rental property owners and landlords—especially new landlords—have is that an empty unit can cause you to worry. Vacancies generally mean a drop in income. It then becomes expensive to maintain a vacant unit. So, it could be tempting to ignore red flags on a tenant’s credit check. However, there are many reasons why you should always thoroughly examine a tenant’s credit history.

Though the process of tenant credit checks is straightforward, there are still several things that you need to be aware of.

What are Tenant Credit Checks?

A tenant credit report includes information that provides you with an overall understanding of their financial situation. Credit checks show the current address and address history, credit card accounts, loan amounts, account payment history, recent credit and loan applications, and unpaid debts. 

Reports usually go back between seven and ten years with regards to the person’s credit history. You can see if they pay credit card balances promptly or if they have loans in collection. You will also see information if the person has declared bankruptcy or been through foreclosure. Some credit reports will show if the prospective tenant has applied for credit recently, while other agencies contain information on others who have requested the same report. 

What is a Tenant’s Credit Score?

One of the essential factors of the report is the tenant’s credit score. Credit reporting agencies calculate an individual’s credit score using the following criteria: 

  • Payment history
  • Outstanding balances
  • Length of credit history
  • Type of credit accounts — credit cards, mortgages, car loans, personal loans
  • Applications for new credit accounts

These credit score factors combine to create a FICO score from 300 to 850.

How can you know if your tenant’s credit score hits the mark? According to Experian, here is the credit score range from poor to exceptional:

  • 300 – 579 very poor
  • 580 – 669 fair
  • 670 – 739 good
  • 740 – 799 very good
  • 800 – 850 exceptional

During your tenant credit check, make sure they have a score of at least 600. People who rent accommodation generally can’t boost their credit score by making payments on a mortgage. If they lose their home because of foreclosure, their credit score will take a severe hit. 

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Eviction records generally don’t show up on a tenant credit check. However, debts associated with the eviction process—unpaid rent and debts regarding court costs—will show up on their credit details and affect their credit score. 

If you want to check for eviction history, you should get a rental history report. Depending on your state laws, you should also do criminal background checks. This background report includes a history of any crimes committed. However, some states prohibit this as they don’t allow landlords to refuse housing to someone with a criminal history. 

4 Benefits of Tenant Credit Checks

Let’s look in detail at the four benefits of checking a tenant’s credit history. 

1. Tenant credit checks detect spending habits

Someone with many credit cards or loans may suggest that they aren’t particularly good at controlling their budget. Another thing to look for is their credit utilization rate. This is the total amount they currently owe divided by their credit limit. 

For example, suppose a person’s total credit limit on three cards is $10,000, and they owe $6,000. In that case, their credit utilization rate is 60 percent. Most credit reporting bureaus say that a healthy credit utilization rate is 30 percent. So, in our example, the ideal tenant would owe $3,000 or less on their credit cards. 

It’s crucial to check that prospective tenants keep balances on credit cards relatively low and are not maxing out on the credit card limit each month.

2. Credit profile shows if tenant pay bills on time

Checking a tenant’s credit reports allows you to see if they usually pay their rent on time. Your income comes from your tenants’ rent payments. If some of your tenants make late payments, you risk not meeting your own financial responsibilities. Therefore, you must check that a potential renter is in the habit of paying all bills on time. 

The rental credit check shows if the potential tenant generally makes all their payments on time. Remember, the odd late payment isn’t the end of the world. But a poor payment history would certainly be a cause for alarm. 

3. Check if the tenant has submitted the correct information

Once you have a credit report, you can use the public record information to confirm the details on the application form. It might be a case of different names, unlisted previous addresses, or inconsistencies with employment history. While some might be genuine mistakes, too many discrepancies could point to a candidate who has a habit of lying or has something to hide. 

4. Differences in income

Credit reports don’t contain income amounts. But a red flag could be reporting high income on an income verification letter with the application and having a poor credit report. Logic would suggest that someone who is earning a lot should have their debts under control. High income and a bad credit report suggest someone who isn’t sensible with their money. 

How to Run Tenant Credit Checks

You should be aware of a couple of things before you start to run tenant credit checks. First, credit checks cost money. Depending on the agency, it could be between $30 and $40. Therefore, it’s recommended only to carry out a credit check on a serious rental applicant. 

Most rental applicants should expect to pay an application that includes a fee for the credit report and tenant screening. Laws vary from state to state, and there may be limits on how much you can charge an applicant. Be sure they understand that the fee is non-returnable and paying for a credit check doesn’t guarantee approval.

Before you begin the tenant credit check, you must inform them about it. They also must authorize the credit check. The simplest way to overcome this is to include it on the rental application form. They only need to tick a box permitting you to carry out the credit check. You can inform them of the cost and remind them to make sure their details are correct. 

The information you need for the credit check will be on the application form. You will need the applicant’s name, current address, and either their social security number or individual taxpayer identification number (ITIN).

There are three major credit bureaus that provide screening services:

  • Equifax
  • TransUnion
  • Experian

They also have other reports that can help with the tenant screening process.

rentdrop tenant credit checks insight

Use Rent Collection Apps for Tenant Credit Checks

One of the best ways to run a credit check on a tenant is to use a rent collection app. Many of the best rental apps have a screening tool that links to major credit reporting bureaus. You can use this feature for screening tenants, including checking applicants’ credit reports. 

This is an excellent option if you have many credit checks to carry out. Rent collection apps help to streamline your landlord business. With the app, you can collect rent and security deposits online, manage maintenance, and process rental applications. 

Top tip for processing rental applications: You can refuse a tenant’s application if they don’t authorize a credit check. 

What Not to Do When Checking Credit Reports

There are a couple of things that you can’t afford to do when using credit check services. For example, you must check with state laws to get written authorization. Here are just a couple of other things that are worth remembering:

  • Not everyone is old enough to have a credit history. For some, this could be their first rental, and they may not have ever applied for credit. That’s not to say that they won’t make great tenants. In this case, you can ask a relative with a credit history to co-sign. 
  • You need to have the same standards for everyone. You can’t exclude applicants based on gender, race, religion, sexual preferences, or disabilities. Similarly, you also can’t set different credit standards for different people. If, for example, you have decided on a credit score of above 650, it should be the same for everyone.
  • Don’t base your decision solely on the credit score. There could be legitimate reasons why the credit score is low. It doesn’t automatically mean they will be a bad tenant. So, if in doubt, ask for more proof of financial responsibility.

Why Tenant Credit Checks are Vital on Rental Applications — In Conclusion

A tenant credit check gives you an excellent overview of a potential tenant’s financial position. This part of the rental application process helps you decide if they are a good fit for your unit. Of course, your decision shouldn’t only be based on a credit report. If the credit report and other indicators are positive, you can sign the paperwork, collect the security deposit, and hand over the keys.

Checking a tenant’s credit history should give you peace of mind, knowing that you’ve done all to ensure that they are the type of tenant who pays rent on time.

Topics: landlord tenant law, credit checks, rental application