How Important is a Tenant’s Credit Score?
The credit score has become a three-digit obsession because so many lenders rely on it when making underwriting decisions, but this isn’t the only reason. The three major credit bureaus are partially responsible for this obsession because they’ve been aggressively marketing it to sell it consumers. Funny thing: Only one of the bureaus for most of this time has been offering the actually score that matters – commonly known as the FICO score. This is the primary algorithm used by at least 90% of lenders in the United States.
Credit scoring (unknown to most consumers) can very easily be manipulated with revolving tradelines such as credit cards, because these types of accounts are reported to make up at least 30% of a FICO score calculation. How, you ask? That will be discussed at length in a future post..
So how important is the credit score when considering an applicant for tenancy? Technically, not very. Could you ease through the process by just considering a three-digit score? Sure, but you’ll miss a lot of good tenants. This is because there are many factors (that have no bearing on a person’s ability and willingness to satisfy a rental agreement) that can negatively affect a prospective tenant’s credit score.
Here’s just a few examples:
- Medical Collections – An unpaid hospital bill or doctor bill assigned to a collection agency can drop a credit score like a rock, but does it truly matter?
- Credit Inquiries – If you apply for credit (apartment hunting, car shopping, etc.) you score may take a hit of up to 5 points each time. So the fact that you applied more then 2 times in the past two years (combined), this can easily drive a score down and has no bearing on tenancy most of the time.
So what should you loo for if not the credit score?
Look at what matters… Have the utilities been paid on time? Has prior rent been paid on time? Are there eviction filings? Has the car payment been on time? These are just some of the more important and essential questions that should be answered.
Call our customer service department if you have any questions – we enjoy helping landlords – it’s what we do.