Understanding A Credit Rating Of Potential Tenants

“Understanding A Credit Rating Of Potential Tenants” written by Mike Marko

Are you looking to understand how to use a credit rating when you conduct a tenant background search?

As a property manager, one of the processes that you usually do is ordering a credit check of a prospective tenant. Checking the credit history of an applying tenant is one essential part of the tenant screening process. As you receive the credit report of a prospective tenant, you will discover the credit history and the credit rating of that person.

It’s important that as a property manager that you understand what a credit rating tells you about a prospective tenant. If you are not aware of this, then you should gain an understanding of this term so you’ll have an easier job of assessing prospective tenants based on their credit report.

That’s why today I’m going to help you better understand how you can use a potential tenant’s credit rating to help get the best tenant for your properties.  

What To Know About Credit Rating?

A tenant’s credit rating can tell you a lot about a tenant.  It can suggest the financial condition of the tenant and help you foresee if they will pay the rent on time.  

Before we talk about why and how to use a credit rating in the rental process, let’s first start with answering “what is credit rating? and what it could tell us.

Definition Of A Credit Rating

A credit rating is a score assigned by one of the 3 credit bureaus after evaluating the financial history of an individual.

When a person establishes credit, takes out loans, or pays their bills this behavior is detailed and evaluated into a credit score for the individual. A credit score is normally issued by an entity that runs a credit check and has relationships with all financial institutions to evaluate how the credit and financial history for the individual have fared. Credit scores are issued by the three credit bureaus, also known as the 3-B.

A credit rating can also be called an F.I.C.O. score which was based originally on scores issued by the Fair Isaac Corporation or FICO. However, now a credit rating or F.I.C.O. score is a score given by any company that does credit checks.

The credit score can indicate the riskiness of the corporation through the credit grade that they have earned through their own financial history.

Purpose Of A Credit Rating

In a property manager’s case, the credit score or rating is based on the individual’s historical financial data and how they have paid their bills and financial responsibilities in the past. So the credit score is the rating of credit based on a personal finance’s standpoint.

Property Manager And A Tenant’s Credit Rating

So… for a property manager, a credit rating is a credit score that helps you understand historically how a person has paid their financial responsibilities. A credit score consists of three numbers from 280 to 850 that help you understand the financial stability of the potential tenant. These scores, low to high, will help to identify whether your potential tenant has a poor, fair, good, or best credit score.

Now, what’s the purpose then?

The purpose of a credit score for a property manager is to easily provide you an idea whether your potential tenant is creditworthy. Since it’s a credit score, a lower score will indicate that the tenant has had problems paying their bills and credit responsibilities in the past. A higher score will help you determine if your potential tenant has high, fair, or low credit risk.

Major Credit Bureaus

When using the 3-B or major credit bureaus you can receive a credit score on an individual in just a few seconds. The credit score will help you to analyze the financial capacity of your potential tenant. The credit score can help you determine if the person can pay the rent on time or has a problem paying their bills and financial responsibilities in a timely manner. The higher the credit score, the greater the possibility that your potential tenant will pay their rent on time and possibly be a good tenant for the property you’re renting.

This credit rating will help you assess if your potential tenant has insolvency in the past with regards to all their financial history and any past borrowings. If your potential tenant has a high credit rating, it means that they are responsible for paying their credits and therefore, they could be a good paying renter in the future as well.

The Ranges Of Credit Rating

Well, based on the credit rating from the three credit bureaus (Experian, Equifax, TransUnion), which happens to be the most popular credit checking entities, the credit scores of your potential tenant will range from 280 to 850.

Here are the ranges of the credit scores of the three credit bureaus.

  •   Equifax – 280-850
  •   Experian – 330-830
  •   TransUnion – 300-850

If your potential tenant’s credit score is only around 600 or below that, (from the three credit bureaus) then your potential tenant is more likely to have a higher credit risk. The lower score indicates that they have problems paying their financial responsibilities in a timely manner.

A credit score below 700 can indicate that the individual has many financial responsibilities and could have issues paying rents and bills on time in the future. Although a 700 credit score is not necessarily bad, some property managers prefer to have a credit score of their potential tenant to be 700 and above. When an individual has a credit score of 700 and above this implies a low credit risk for your potential tenant.

The highest credit score is 850. It’s the highest possible credit rating given to an individual. This only shows that your potential tenant’s credit report states a stable and healthy financial status.

Use Of A Credit Rating

In a background check where you are able to run a credit report, the score assigned is called a credit rating and mostly referred to as a credit score for property managers.

The credit score is used to summarize the credit report. And this will give you the idea that your potential tenant may be risky or not.

So for example…

Your potential tenant has a credit rating of 600. This potential tenant has a possibility of having a high risk of credit. Whereas a credit score of 720 or higher would mean that the tenant has great financial habits and pays bills and financial responsibilities in a timely manner.

Depending on the credit score of a person, you can determine if that person has a high or low risk of credit.

Final Thoughts On What To Know About Credit Rating?

Using a credit rating can really help you in getting an overall picture of your potential tenant.  By knowing their credit rating, you can make a quick assessment of whether a potential tenant is financially stable or not.  It can give you an idea if a potential tenant could be responsible for paying rental fees in the future.

As a property manager, it will be useful for you to be familiar with the different indications on a credit report. It helps you come up with a faster assessment of the financial condition of a potential tenant.




Suggested Articles:
1. The 5 Main Responsibilities Of Real Estate Management Companies
2. How To Start A Property Management Company
3. Why You Need To Get A Credit Report Regularly

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Article: Understanding A Credit Rating Of Potential Tenants

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