How to Use Credit Reports to Select Tenants

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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Written by Jeffrey Johnson
Insurance Lawyer Jeffrey Johnson

UPDATED: Jul 15, 2021

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Being a landlord comes with a lot of responsibility, and the most important task is finding the perfect tenant. Once you’ve found the right candidate to rent in your building, you want to make sure you learn as much as you can about that tenant to make sure you’ll get paid without a problem. One important tool you can use to check on a tenant and evaluate the likelihood of problems is the tenant’s credit score. What happens, though, if you believe you’ve found the perfect tenant and then their credit comes back low? Don’t be too hasty. There are many factors that might cause a tenant’s low credit score that don’t necessarily mean that the prospective tenant is irresponsible or won’t pay their rent.

Evaluating a Credit Score

The first key question you have to ask yourself when a tenant has a less-than-perfect credit score is just how low that score is. FICO scores technically range from 300 to 850, although almost no one actually has a score at the extreme ends of the scale. In general, any scores above 700 are considered to be either good or excellent, and any scores below 620 are considered to be high risk.  Buyers with scores below 620, in fact, are usually relegated to sub prime lenders if they can get credit at all.

As a landlord, you may be tempted to take your cue from the banks and other lending institutions and set a cut-off point. For example, you may want to say that anyone with a score in the low 600s or below is just too much of a risk- after all, if other creditors in the past have been burned by lending to that person, why would you take a chance on letting them in your building?

However, some landlords are willing to be more forgiving of a low credit score, or are willing to look deeper. If you are open to the possibility of lending to someone that has average or poor credit, keep in mind that there are factors that can lead to a low credit score that may have little or nothing to do with whether the tenant will pay their rent or not.

Renting to Low-Credit Score Tenants

To rent to that perfect tenant, you need to move beyond looking just at the credit score – you need to look at the credit report and perhaps talk to the tenant as well. When you look at the report:

  • Consider how long ago the most recent default or negative information was. If the person has a bad score because they were late on payments three or four years ago, this may not be indicative of their financial behavior now. Even if a tenant had a late payment or two three or four weeks ago, it may be clear when you look at the rest of the credit report that the late payment was an isolated incident. Forgetting a single payment, even if coupled with negative marks years ago, could happen to anyone.
  • Look at why the score was low. While you won’t be able to tell for sure what caused the financial trouble, you should be able to see whether the low score may have been caused by defaults on credit cards, medical bills or other types of debt. Someone who got into trouble because of medical costs may not necessarily be a bad credit risk at all- he may have just had a run of poor health that was too much to take.  If there are clusters of late payments during a specific time frame, ask the tenant what happened. You may find that the tenant has a reasonable explanation, such as having been laid off from a job. If the tenant is employed now and has been for a reasonable period, there is no reason to assume that financial problems caused by a lay-off will affect the tenant’s ability to pay rent currently.
  • Check out their debt to credit ratio. If they have a lot of debt right now, you may assume that the tenant is at risk of falling behind. However, sometimes the debt to income ratio can be deceiving. For example, is the tenant a recent college grad? Student loans may depress a credit score drastically because the student has been borrowing with little income during school. It may take time for the tenant’s credit score to increase under these circumstances, and remember, student loan payments are adjusted according to income to leave money for the borrower’s living expenses. 

If you feel uncomfortable or concerned, some states allow you to demand an additional deposit as a condition of the lease. Or, you may request a co-signer. The bottom line is, there may be an explanation for the tenant’s low credit score. If you like the tenant, read between the lines and you may find that the perfect tenant is a perfect fit after all.

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