Credit reports offer invaluable information to base your rental decisions on credit scores, tradelines, income-to-debt ratio, and much more. One thing you won’t find on a credit report, however, is an applicant’s rental history. Since landlords and property managers aren’t creditors, they don’t automatically report tenants’ payment history to the consumer credit reporting bureaus.
What’s Included in a Credit Report?
Most of the information in an applicant’s credit report comes from financial institutions, such as banks, credit unions, and lenders. In some cases, they may also contain information from the courts. Credit reports contain the following information:
- Personal information: The applicant’s name, birth date, phone number, current address, past addresses, and employers
- Accounts: Existing tradelines, like loans, lines of credit, credit cards, collection accounts, last reported balances, payment history, and account statuses
- Public records: If the applicant filed for bankruptcy, it will show up here.
- Inquiries: When an individual or company requests a credit report or the individual applies for credit, it will show up as an inquiry for two years; only hard inquiries affect the credit score.
How to Interpret the Information on a Credit Report
If you can’t see rental history on a credit report, how can you determine how an applicant will behave once they’re your tenant? Credit reports can give you a reasonable indication of an applicant’s creditworthiness and ability to manage their finances. Although you won’t receive a list of their on-time rent payments, a credit report can provide a lot of information to help you determine if they have a history of responsibly managing financial responsibilities, like paying rent and bills.
For example, if an applicant has several accounts that show on-time payments over the course of several years, this is a good indication that they’re consistent with meeting financial responsibilities on time. Looking at the length of time they’ve stayed at a job, as well as how many accounts they have open and their overall payment history paint a picture of how stable an individual is.
Total Debt and Rent-to-Income Ratio:
The amount of debt an individual has affects their ability to afford the rent each month. If an individual has an excessive amount of debt, especially in comparison to their total income, it will make it more difficult to pay their rent on time. The gold standard for rent-to-income ratio is 30%, which means no more than 30% of an applicant’s gross income should go to rent.
Open and Closed Accounts:
Looking at an applicant’s open and closed accounts can also give you some indication of how they’ve handled their finances. Open accounts are typically revolving credit (like credit cards) while closed accounts can either be an account that was paid in full or accounts that still have a balance due. “Satisfactory” accounts are closed accounts that have been paid in full. When selecting an applicant, you should check to see whether their closed accounts were in positive standing.
Bankruptcies and Collections:
Bankruptcies can be a red flag that the applicant has difficulty managing their finances responsibly. Bankruptcies stay on a credit report for up to 10 years. On a credit report, you’ll be able to see all the accounts that were included in the bankruptcy. A tenant with a discharged bankruptcy is less of a risk than one who has a pending bankruptcy; with a pending bankruptcy, the applicant may be relieved of all financial obligations—which includes rent payments. If a tenant failed to make payments on an account—or even rent payments to a past landlord—and they were reported to collections, you’ll be also able to see this on a credit report.
Consider Adding Tenant Verification to Your Credit Report
Although credit reports are one of the main ways to determine an applicant’s worthiness as a tenant, adding on tenant verification can give you a more complete picture of what you can expect if you choose to rent to an individual. With a tenant verification, we contact the applicant’s previous landlords on your behalf and you’ll receive the following information:
- The applicant’s current and previous address
- The length of time they lived at each property
- Whether the applicant gave proper notice of their intent to move
- The applicant’s current and previous monthly rent payments
- Whether there have been any late payments, bounced checks, balances owed, complaints on file, or legal notices
- Whether the applicant has any pets
- Whether the applicant would be eligible to re-rent either property
- Verification of the applicant’s current employer
- The length of time the applicant has worked at the company, their position, salary, and employment status (full-time/part-time)
With our tenant verification services, you can make sure the information your applicant provided is consistent with this report—and that they have a proven history of meeting their rental responsibilities. For more information, contact TSCI at 800-523-2381 or order your reports online.
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