What Landlords Need To Know About Tenant Credit Reports

When choosing a tenant for your rental property, finding someone who’s financially responsible and will consistently pay the rent on time is essential. Choosing the wrong tenant can be stressful and costly, especially if the tenancy ends in eviction. Credit reports are an excellent way to assess an applicant’s financial situation and protect your property. 

However, credit reports are just one tool you should use when conducting tenant screening. For this reason, it’s important to understand what type of data they provide and how you’re legally allowed to use this information. Here’s a closer look at what you should know about tenant credit reports. 

Please note that this is for informational purposes only and is not intended as legal advice. Laws may vary depending on your location. 

What Do Credit Reports Include? 

Credit reports provide an overview of an applicant’s financial status, such as: 

  • Credit score
  • Payment history
  • Types of credit accounts (such as mortgages, car loans, or credit cards)
  • When the credit accounts were opened
  • Credit or loan limits
  • Account balances
  • Payment history
  • Credit inquiries
  • Bankruptcies
  • Collections accounts 

Reviewing this information can give you a good idea of how well a potential tenant will meet their financial obligations. 

For example, if an applicant has a good credit score, impeccable payment history, and well-managed credit accounts, it’s reasonable to assume that they’ll continue to meet their financial obligations (including rent payments) in the future. Conversely, an applicant who has occasional late payments and multiple recent credit inquiries raises questions about being consistent with their financial responsibilities.   

Legal Considerations

Keep in mind that when using credit information for your rental decisions, you’re legally obligated to comply with the federal Fair Housing Act. You must treat all applicants fairly and aren’t allowed to discriminate based on race, color, national origin, religion, sex (including gender identity and sexual orientation) familial status, or disability. 

Some states, like California, include additional protected classes, such as age, ancestry, genetic information, military/veteran status, and more. In some areas, local municipalities may also have protections for specific classes. It’s essential to familiarize yourself with federal, state, and local housing laws to ensure you’re in compliance. 

What Information Do You Need to Run a Credit Report?

A well-designed rental application not only helps you filter out unqualified candidates—it also allows you to gather information for a credit report. Here’s a list of some of the most important information your application should include:

  • Personal details: Full name, current address, Social Security number, date of birth, and driver’s license number
  • Employment and income
  • Names of co-habitants, such as family members or roommates
  • Residence history, including any prior evictions
  • Disclosure of relevant criminal convictions
  • Information about pets, vehicles, and smoking status

According to the Fair Credit Reporting Act, landlords are permitted to obtain consumer reports (such as credit reports and background checks) without permission from the applicant, provided there’s a valid purpose. When ordering a report, you’re obligated to certify that the information you receive will be used exclusively for housing-related purposes. 

In addition, some states may enforce stricter regulations on how consumer reports can be used compared to federal laws, so it’s essential to make sure you’re familiar with the laws in your state.  

What Should You Look for in a Credit Report?

Credit reports contain a fair amount of information, but there are some metrics you should pay special attention to when evaluating a potential tenant:

  • Credit Score: Credit scores can provide valuable insights into an applicant’s financial health, but they’re limited in scope and can be deceiving. For example, a high credit score might signify a strong payment history and responsible credit management. However, it might not reflect recent financial challenges or unexpected circumstances that could impact the applicant’s ability to meet future obligations. 

Likewise, a low credit score could indicate past financial difficulties or missed payments, but it may not account for recent improvements in the applicant’s financial habits. They may have experienced temporary job loss or medical expenses in the past, but have regained stability and are diligently working to improve their credit. When looking at the credit score, it’s vital to take the rest of the credit report into account to get a better understanding of the reasons behind it.  

  • Debt Load: Debt load refers to the total amount of debt that an individual carries at a given point in time. It encompasses all forms of financial obligations, such as loans, mortgages, credit card balances, personal debts, and any other liabilities. Assessing the applicant’s rent-to-income ratio (RTI) can help you figure out whether they’ll be able to comfortably pay rent on time.  

This ratio is determined by dividing the monthly rent by the monthly gross income. Most landlords follow the 30% guideline, which means the monthly rent doesn’t surpass 30% of a tenant’s gross income. For instance, if a tenant’s monthly gross income totals $6,000, the suggested maximum affordable rent would be $1,800 per month based on this 30% threshold.

  • Late Payments: If a tenant has a history of making late payments on their credit cards or other bills, it can be a sign of their overall payment behavior. Consistent late or missed payments suggest a pattern of financial irresponsibility that will likely affect their ability to pay rent on time. 

However, like credit scores, it’s important to note that occasional late payments might not always reflect an individual’s overall financial responsibility. Life circumstances, such as unexpected emergencies or temporary financial hardships, can sometimes lead to isolated instances of late payments. Therefore, while late payments can raise red flags, you should consider the rest of the credit report before making a final judgment. 

  • Credit Inquiries: There are two types of credit inquiries: “soft” inquiries and “hard” inquiries. Credit reports only list hard inquiries, which refers to instances where a tenant has actively applied for a new line of credit, like a loan or credit card. Multiple hard inquiries within a short period of time can be a red flag that the applicant isn’t financially stable. In addition, each new account opened adds to an individual’s overall debt load and may affect their ability to pay rent. 
  • Delinquent Rental Payments: When reviewing an applicant’s rental history, pay close attention to instances where the applicant has been delinquent in paying rent to previous landlords. This could indicate a pattern that will continue if you choose to take them on as a tenant. 
  • Negative Information: Keep an eye out for red flags, such as bankruptcies, liens, garnishments, car repossessions, accounts in collection, or similar financial setbacks as they indicate a potential risk in terms of the applicant’s ability to manage their finances responsibly. 

If you’ve reviewed an applicant’s credit report and decided to reject an applicant, you’re required by federal law to let them know why they’ve been rejected. In addition, you must provide the contact information for the credit reporting company you used and inform the applicant that they have the right to dispute the report. You should also let the applicant know that your decision to reject them was yours alone based on the content of the report, rather than the decision of the reporting company. 

Safeguard Your Rental Properties—Order Your Tenant Screening Reports Today

When used in combination with other screening reports, a tenant credit report can be an extremely useful tool for safeguarding your rental properties. At TSCI, we offer several different tenant screening packages to help residential and commercial landlords make the most informed rental decisions. 

Our RentalConnect reports range from basic credit reports and eviction history to criminal history and tenant verifications. Each of our packages also comes with a rental application. In addition, our reports can be purchased online 24/7 and the cost of the screening is deferred to the applicant. Order your tenant screening reports today or feel free to contact us at 800-523-2381.   

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