Which Credit Scoring Model Should You Use for Tenant Screening?

Credit Score Selection

Credit scores are one of the best ways for rental housing professionals to gauge an applicant’s financial competency and reliability. As you probably know, the closer the score is to 850, the easier it is to secure loans, lock in lower interest rates, and find housing. That’s all from a consumer standpoint, but what about the differences between credit-scoring models? Which one should you choose when screening applicants?

Credit Risk Scoring Models

First, it’s important to understand that there are many credit risk scoring models, but the ones that are most commonly used are FICO and VantageScore. Both of these models use the credit card information pulled from Experian, TransUnion, and Equifax (the top 3 credit bureaus) and analyze it to determine a credit score.

The formula used by each model can differ based on the reason the report is being run. So, the formula used to calculate the credit score for a car loan might be different than the formula used to determine the credit score for housing. While the differences are generally small, it is important to note that a consumer’s credit score can be slightly different based on what they’re applying for.

You could work with other scoring models, but FICO and VantageScore are the most trusted in the industry – and considered the gold-standard for tenant screening. Other scoring models may skew the score in favor of the applicant or in favor of whoever is ordering the report. Some even disregard sending over the actual numbers, giving you smiley faces or checkmarks as a grading system instead. To make sure you’re getting the most accurate information possible, it’s important to make sure you’re working with a reputable screening service.

FICO vs. VantageScore

Here’s a look at how the two major credit scoring models differ:

FICO was developed by Fair Isaac and Company in 1989 and is one of the oldest credit scoring models used today. The company has revised the model several times since it was first developed, and the most recent version is FICO Score 8. Some of the benefits of using FICO are:

  • – It’s widely recognized and used by lenders, making it the standard for many industries including rental housing. This also means many applicants are familiar with the credit range of 300 – 850 and know their previous FICO score.

  • – The model is constantly being updated to accommodate a wide range of industry standards. Since FICO is the oldest model and has been around for decades, Fair Isaac and Company have plenty of experience with making adjustments to make the model fit given the current financial climate.

  • – FICO offers a base scoring model, as well as industry-specific scores.

VantageScore was developed by Experian, TransUnion, and Equifax (the three major credit bureaus) in 2006. While FICO is an independent credit scoring company, VantageScore gets its information directly sourced from the bureaus’ data. Some of the benefits of VantageScore include:

  • – Since VantageScore pulls information directly from the credit bureaus, millions of consumers who didn’t have enough credit built up to meet the minimum scoring requirements (also known as “credit thin”) in the past now have a credit score. To generate a score, FICO requires consumers to have a credit account that’s at least 6 months old. In addition, that account must have had activity within those 6 months. VantageScore makes it possible for credit thin applicants to receive a score as long as they have one credit account. The account can also be less than 6 months old. This means that if you’re screening a young applicant or someone who just has a limited credit history, you’re more likely to get a report that includes a credit score.

  • – It doesn’t make a difference which of the three main credit bureau you request the report from – the information on it will be the same. This can reduce confusion for your applicants. With FICO reports, the model is tailored to be bureau-specific, so you may receive one score from Experian and a different score from Equifax.

If you’re screening an applicant, it’s important to note that the differences between the two scoring models only affect the credit score. The rest of the information on a credit check will be based on the data, rather than a calculated model. The information below will be the same, regardless of whether you choose FICO or VantageScore:

  • – A summary of the applicant’s positive and negative credit accounts
  • – Payment history
  • – Prior credit inquiries and the dates they were made
  • – Total estimated past due and monthly debts
  • – A breakdown of their accounts

How will COVID-19 affect credit scores?

It’s not completely clear how COVID-19 will affect credit scores yet. Every consumer has a different credit situation, coupled with the fact that the models rank certain financial situations differently. Currently, the Coronavirus Aid, Relief, and Economic Security Act (CARES) prevents financial data reported from lenders to lower consumer’s credit scores. VantageScore is also working on making adjustments to their model to minimize the negative impacts of things like forbearance and deferment. Experian, TransUnion, and Equifax are also providing free weekly consumer credit reports for one year.

Which should credit scoring model should I choose?

When it comes to choosing which credit model to go with, think about what works best for you and your properties. Is your rental in a college town, with many young applicants who are likely credit thin? If so, VantageScore may be the better option. Do you feel safer going with the score that’s preferred by lenders and has a long history? You may want to choose FICO.

By understanding the differences in scoring, you’ll be able to assess whether a tenant might be impacted by one model than another. This is also one reason why supplementing your credit check with additional screenings, like a background check or tenant verification is so valuable. Regardless of which score you choose you’ll have additional information to base your decision on. Our RentalConnect service is a great option for landlords, as there are several levels of reporting available to choose from, all while deferring the cost of the screening onto your applicants. It’s easy, convenient, and available online 24/7. If you have any questions about RentalConnect or any of our other screening services, feel free to contact us.

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