Why A Rental Credit Check Is Important For Your Success

“Why A Rental Credit Check Is Important For Your Success” written by Mike Marko

Are you prepared for screening new tenants?

When a tenant submits a rental application form it means they are interested in the home, and it probably means that your property suits his or her budget. But how long will they be able to afford it, will they pay on time, and will they take care of the property during their stay?

There’s a way where you can check the financial status of every prospective tenant. It is like peering into a crystal ball. That’s why today we’re going to discuss how a rental credit check can help you in screening prospective tenants.

Rental Credit Check And Credit Score

One of the most effective ways to screen prospective tenants for rental is by conducting a complete rental background check with a credit check included. Most property managers today are conducting background and credit checks on every prospective tenant. In fact, in a 2014 study by TransUnion 43% of the surveyed landlords are using a credit check when doing a background check on prospective tenants.

Experienced property managers use credit scores and reports to sort the applications of prospective tenants. Sorting using this process helps them to prioritize the applicants that have the capabilities to pay bills and rents on time and become a good tenant to rent the property.

So now let’s begin to understand how a credit report affects the rental application process.

What Is A Credit Report?

A credit report is a historical representation of how an individual has paid their bills, loans, and other financial responsibilities. A credit report contains detailed information about the applicant’s credit activities and it is usually divided into different sections:

  • The first section contains the basic information of the prospective tenant. It includes the name, address, date of birth, contact information, and current workplace of the applicant.
  • The second section of the credit report is where you can find the historical summary of the individual’s credit. All of the information about an individual’ financial accounts will be shown here. Aside from that, this section will also include the individual’s ongoing loans, credit balances, and debts.

Here are the common items found in the second section of the credit report:

  • The number and type of financial accounts that are past due or in good standing
  • The date credit accounts, loans, and any other financial responsibilities were opened
  • Detailed account information related to high balances and payment history
  • Credit limits

The remaining sections of the credit report typically contain public records and names of individuals or agencies that requested the credit report for loans and other financial purposes. Various information such as bankruptcy, legal judgments, court records of your state and country, tax liens etc. are also found in the public record section of the credit report.

Negative items on a credit report such as late payments, foreclosures, evictions, bankruptcies, and many other blemishes remain on the credit activities for the last 7 to 10 years. Since a credit report is a historical representation of how the individual maintains their financial responsibilities, a lot can be inferred from negative items on a credit report.

The experienced property manager will always look for individuals to rent property to that have an excellent credit report with on-time payments and a good manageable credit balances. When a credit report shows only excellent financial history for the individual you can assume that the applicant is not having any financial struggles and would be able to pay rents on time if you rent them a property

Important Tips To Remember When Conducting A Credit Check

Having a background screening process that includes credit checks is important to screen prospective tenants applying for rentals of your properties. To avoid any legal concerns and possible discrimination when running rental credit checks on prospective tenants it is best to follow the tips below:

  • Run a credit check on every prospective tenant
  • You must have a written consent from the applicant before you can do a credit check
  • As the property manager, you must be eligible to check the credit of the prospective tenants. That means you may have to go through an approval process from the credit check company.
  • All of the applicants must undergo the same process of screening to avoid discrimination
  • Always follow the terms of Fair Credit Reporting Act.
  • Keep all of the necessary documents in a secure place in case a tenant tries to accuse you of discrimination.
  • Don’ favor the applicants with a perfect background and credit report without careful scrutiny. It is easy to fake documents nowadays.
  • Send an Adverse Action letter if you rejected an applicant with bad credit.

Tenant’s Past Mistakes

If the rental credit check of the applicant contains negative items, it is advisable to arrange a personal meeting to talk about their past mistakes.

Common examples of negative items on a credit report:

  • Bankruptcy
  • Legal judgments
  • Tax liens

Most property managers also consider past evictions as the sign that the applicant is not qualified for their rental property (though this typically does not show up on the rental credit check).

Past evictions indicate that the applicant has done a lot of red flags or violation on their previously rented property. Violations can be either late payments, unpaid bills, damage to property, or the applicant has received a lot of complaints from fellow tenants.

Writing down the negative items or red flags while reviewing the credit report of an applicant is useful. It can help you remember to ask the candidate key questions to get clarity on your findings.

As a property manager, you can ask for an explanation for each of the negative items during the interview. Also, be sure to ask if the applicant is doing resolutions to improve their credit report.

Declining Tenants With Poor Credit

You have the right to decline a prospective tenant with a bad credit. However, Fair Credit Reporting Act requires you to follow some guidelines whenever you decline a tenant.

If the applicant was declined, the property manager must mail an Adverse Action. This mailing must include a detailed information why the rental application of the prospective tenant is declined.

Important information such as the name, address, and phone number of the agency that you used to run the credit report must be included. Aside from that, you must also inform the applicant of their right to request a free copy of their credit report from the agency within 60 days.

Final Thoughts About Why Rental Credit Check Is Important

Always remember that you need to conduct a rental credit check on every tenant. This will help you avoid any problem of having a bad tenant. Credit reports contain a lot of the information that you need to determine if a prospective tenant is financially capable of paying rent regularly.

Even if the tenant has a bad credit or poor credit score, that applicant may still be a viable candidate. Follow the tips that discussed to help you make the right choice and good luck with your future tenants.

Please add any thoughts or questions you have below in the comments section.




Suggested Articles:
1. Rental Verification Letter From Property Managers
2. Companies That Offer Background Check Ohio
3. What To Know About Termination Of Lease

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Disclaimer: This commentary is a matter of opinion provided for general information purposes only and is not intended to be taken as investment or trading advice under any circumstances. Information and analysis above are derived from sources and utilizing methods believed to be reliable, but we cannot accept responsibility for any losses any person may incur as a result of this analysis. Individuals should consult with their personal financial advisers. By using this website or any information contained in it, the user specifically and expressly agrees that no advisor-client relationship is created between said user and any author, owner, executive, or principal of this web site by either use of this web site, or by any information, product, or service offered by or on this web site. No express or implied guarantees or warranties as to investment or trading results are made, and any perceived insinuations of such are hereby expressly disclaimed.


Article: Why A Rental Credit Check Is Important For Your Success

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