Are you too focused on prospective tenants’ credit scores?
While a credit score can establish a helpful threshold for applicants, it’s important to understand that today’s credit scores don’t always tell the complete story about a tenant’s creditworthiness. Inflation, higher interest rates, and rising costs for essentials like housing, groceries, and utilities have affected many consumers over the past few years. Even financially responsible individuals may have seen their credit scores dip slightly despite continuing to pay their bills and manage their finances responsibly.
As experienced property managers, we look beyond the score itself and evaluate the entire credit report as part of a comprehensive tenant screening process.
Our Overview:
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Why Do Credit Scores Matter?
A credit score is designed to estimate how likely someone is to repay borrowed money based on their credit history. While landlords are not extending traditional credit, the score can still provide valuable insight into an applicant’s financial habits.
Generally speaking, higher credit scores may indicate that an applicant pays bills on time, maintains manageable debt, and has established credit history. A good credit score demonstrates consistent financial responsibility.
Lower scores, on the other hand, can sometimes signal payment issues, excessive debt, or previous financial hardships.
A credit score should never be used as the sole basis for approving or denying an applicant.
Why Have Scores Changed in Recent Years?
Many property owners have noticed that applicants’ credit scores aren’t always as high as they were several years ago.
Several economic factors have contributed to this trend, including:
- Higher inflation
- Increased housing costs
- Rising grocery prices
- Higher insurance premiums
- Increased interest rates on credit cards and loans
Many otherwise qualified renters have relied more heavily on credit cards to manage everyday expenses. As balances increase, credit utilization rises, which can temporarily lower credit scores even when payments continue to be made on time.
Credit Reports Tell the Bigger Story
Instead of focusing only on the numerical score, we recommend that property owners carefully review the full credit report, which provides context that the score alone cannot. Some areas to examine include:
- Payment History. Payment history is often one of the strongest indicators of future financial behavior. Ask questions such as are rent-related obligations being paid on time? Are late payments isolated or frequent? Have recent payments improved? One late payment several years ago is much different than a pattern of missed payments over the past six months.
- Collections and Charge-Offs. Review any collection accounts carefully. Consider how old they are and what type of debt it is. Multiple recent collections can be a problem. But medical collections may not reflect the same financial habits as repeated unpaid consumer debt.
- Debt Levels. Large amounts of outstanding debt aren’t automatically a reason to deny an application. Instead, look at whether the applicant appears to be managing their obligations responsibly. Someone with multiple loans who consistently pays on time may represent less risk than someone with very little debt but frequent missed payments.
- Recent Credit Activity. A large number of recent credit inquiries or newly opened accounts can sometimes indicate financial stress. However, context matters. Applicants who recently purchased a vehicle or refinanced existing loans may naturally have additional inquiries without presenting a rental risk.
Consider the Entire Tenant Screening Package
Credit reports are only one piece of the screening process. Property owners should also evaluate:
- Employment verification
- Income stability
- Previous landlord references
- Rental payment history
- Eviction history
- Criminal background screening
- Overall application completeness
A qualified tenant often demonstrates consistency across multiple areas.
Avoid Setting Arbitrary Credit Score Cutoffs
Some landlords automatically reject applicants below a specific score, such as 650 or 700.
While minimum screening standards can help create consistency, rigid cutoffs may eliminate otherwise excellent applicants. For example, an applicant may have:
- Stable employment
- Strong income
- Excellent landlord references
- No prior evictions
- A lower credit score caused primarily by high credit card utilization during a period of inflation
Without reviewing the complete report, that applicant might be overlooked despite presenting relatively low rental risk.
Apply Screening Criteria Consistently
Whatever standards you establish, apply them consistently to every applicant. Consistent screening practices help ensure fairness while reducing the risk of discrimination claims.
Many landlords create written screening criteria that outline factors such as income requirements, rental history, and credit history. Having documented standards also makes the screening process more efficient and transparent.
Remember that credit scores change over time. Applicants who experienced temporary financial hardship may now have stable employment, reduced debt, improved payment history, and better financial management overall.
Frequently Asked Questions
Q: What is considered a good credit score for renting?
A: Every property owner establishes their own screening criteria, and the score should always be considered alongside income, rental history, employment, and the overall credit report.
Q: Can someone with a lower credit score still be a good tenant?
A: Absolutely. A lower score does not automatically indicate that someone will be an unreliable tenant. Reviewing payment history, landlord references, income, and recent financial trends provides a much more complete picture.
Q: Should landlords deny applicants based only on their credit score?
A: In most cases, no. The full credit report offers important context that a numerical score alone cannot provide. Looking at payment history, debt management, and overall financial behavior typically leads to better-informed decisions.
If you need help with tenant screening and balancing a tenant’s credit score against your other criteria, contact us at ManCo Property Services. We’re confident in our ability to analyze credit and applications. And remember: If it’s a property managed by ManCo, life just got better!