“Simple Guide on How to Read a Credit Report” written by Mike Marko
Do you know how to read a credit report?
Learning how to read a credit report isn’t a complex task. Usually, you just need to look for the items that can tell you whether or not they’d be good renters.
Unfortunately, many property managers still don’t have any idea of how to read a credit report. Many of them are still confused about what they should look for in it.
Failing to read the credit report properly could result in negative consequences. You could end up taking tenants who aren’t financially capable of paying the rent on time and in full.
If tenants fail to pay rent on time, this can cause instability in your rental property business. That’s why in today’s blog post, I’ll talk about how to read a credit report — just to help you avoid making mistakes when leasing. Knowing how to read a credit report can help you choose the right tenants for your properties.
Learning How to Read a Credit Report
Asking a prospective tenant for his credit report is a given when you’re a property manager. As we just said, checking its details can help you weed out the financially unstable prospects from the stable ones.
But again, that’s only possible if you know how to read a credit report in the first place. This document can tell you a lot about a person’s finances if you know how to interpret it. But before we go into that, let’s talk about what it is.
What Is a Credit Report?
A credit report contains important information about a person’s financial activities. It’s the documented result of a credit check.
Property managers use a credit check to see if a potential tenant can afford the rent and be able to pay on time. This is since a credit report is more or less a history of how a person handles his financial responsibilities.
For example, let’s take the credit score. This is typically one of the first things property managers check if they know how to read a credit report.
A credit score is a three-digit number that’s on the credit report. This number is determined by various other factors you can see in the report. Simply put, though, it’s a number that tells people how likely a person is to repay debt. For a property manager, a high number is good here while a low one is bad.
That’s because a tenant with a poor credit score will be more likely to fail to pay rent on time or in full. If this happens, your rental business ends up with a revenue instability. That’s especially worrying if you have regular expenses!
So a good credit score can be one of your qualifications for prospective tenants. Most rental property business managers only allow tenants with a credit score of at least 650. That should help you find tenants you can trust.
That’s just one example of how knowing how to read a credit report can be of help. So if you see now why it can benefit you, let’s move on to learning how to read a credit report.
Analyzing the Credit Report
First off, don’t be surprised if the credit reports you get from the credit bureaus look different from each other. Each credit bureau organizes its reports differently.
The differences are largely superficial, however. The sections in these reports will still be the same for the most part, just arranged in a different order. The information in them will be the same too.
Here are the sections that are commonly found in a credit report:
The first part of a credit report contains the basic information of the tenant. This includes details like these:
- The tenant’s name,
- His/her current and previous addresses,
- His/her phone numbers, and
- His/her social security number.
Information presented in this section helps you check if you pulled the right credit report. It may be tempting to skip over it, but anyone learning how to read a credit report properly shouldn’t do that.
You need to make sure it’s not someone else’s report you’re holding, after all. What if you make a decision to lease to a person based on a report that turns out to be someone else’s later? You may end up with a tenant who never pays the rent on time!
This section is where you’ll find a breakdown of the potential tenant’s total monthly payments and debt. The information presented in this section gives you an idea if the tenant can afford rent.
When you’re on this part of the credit report, consider paying close attention to the total debt ratio. Some people have a large total debt but a big part of it may be considered good debt.
An example of good debt is student loans. That’s because it was used to gain the person an education, which can generate income for him in the long run. Educated tenants are more likely to have stable jobs, so they’ll be more likely to pay the rent on time.
Right after the credit summary, the next section is usually about the prospective tenant’s payment history. In this section, you’ll see a note of each time the tenant made a late payment.
Details in this section will give you insight into whether or not the tenant has a habit of making late payments.
This part contains 25 months of payment history for each account.
Usually, the payments that are paid on time are shown in green. Late payments are the items in yellow and the red ones are the unpaid payments.
When you’re choosing tenants, make sure that the number of green items is higher than the number of yellow ones. Logically speaking, tenants with a lot of late payments on their record will be likely to be late with the rent too. That’s why knowing how to read a credit report Account History section is very important.
Look for Negative Information
Property managers who know how to read a credit report also keep an eye out for other negative information besides late payments. If you know how to read a credit report, you’ll know to look for these in the last part of a report.
That’s where you’ll find a list of all the negative information on a prospective tenant’s financial activities. In this section, you’ll find accounts that haven’t been paid, collections, and public records such as court judgments, liens, and bankruptcies.
Negative information like this will stay on the tenant’s credit report for 7 years. Usually, property managers avoid tenants with a lot of negative items on the credit report.
Final Thoughts on How to Read a Credit Report
In this blog post, I talked about how to read a credit report. It’s important for you to know how to do it so you can refine your tenant screening process.
The credit report is the documented result of the potential tenant’s credit check. It contains all of the important information about the potential tenant’s financial activities.
Usually, the credit report is divided into sections. It consists of personal information, credit summary, payment history, and account history.
You should focus on the payment and account history. This section of the credit report tells you how a potential tenant handles their financial responsibilities. Also, the negative information on the report should also be considered in choosing your tenants.
If you have questions about how to read a credit report, leave them in the comment section below.
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