I wanted to expand on the credit score criteria in any Tenant Screening Requirements just a bit.
It is a fact that lower credit score individuals are a high risk to insurance companies, and for collecting payments. It is a fact that lower credit score individuals engage in riskier behaviors.
Here is why tenants with a low (or 0) are high risk.
At any rental property, especially a multifamily complex, an insurance claim could be catastrophic not only to yourself, but to other owners, and other tenants. There is also the fact that lower credit score individual people have a high preponderance of poor personal behaviors.
This may be the fact that riskier behaviors are generally behaviors that are not acceptable by many people. Lighting off fireworks in a high-density environment, fighting, speeding, being drunk in public, DWI, driving without insurance, dealing and using drugs, etc. would be examples of risky behaviors that we would want to avoid.
Higher Credit Scores = Higher Profitability
If you are trying to create a more profitable environment, preventing insurance claims is one way. Creating an environment where one tenant does not scare away another tenant is another. Both of these can be traced to credit score.
When an individual does not have a credit score, we do not know if in a few months it will be 400, or 700. But we do know that having a good credit score is a choice people can make. By applying for a secured Visa card, available at most banks and many places online, a person can have a 700+ credit score in less than six months. There is a 99%+ approval rate for these cards. So, a solid credit score is easy to be had. Why do people not want to get a good score, or are unable to get one?
When a person has bad credit, then goes to a cash basis lifestyle, they will eventually lose their credit score but not their credit history. We recognize this as a person who used to have bad credit, and probably bad behaviors, and reject them. We look for any ‘bad’ hit on their credit report, and criminal reports, no matter how small. Bad people cannot stay good forever, so there is usually something that shows up.
A Good Credit Score Takes Work
A credit score is the one thing that people have to do something positive to achieve. A clean criminal record can be had by just avoiding getting caught.
When a person has a perfectly clean criminal record and a clean no-score report, it is generally someone who has been in the country a short time, or a young person who has not applied for any credit. Both are high-risk, as the criminal history time frame that we can check is short. Any juvenile records are not available, nor are records from other countries.
The National average credit score for rental applicants is ~658. This is the same as my experience screening tenants for a large complex. We want someone without a credit score to be on the lease with someone that has at least close to an average credit score, or 650. The no-score applicant must also be someone who has a 100% clean record otherwise, both credit and criminal. This indicates someone that we expect is a person that will demonstrate financial and personal responsibility in the future, but has not yet had a chance. We want to avoid someone who has given up and dropped off the financial system radar. The problem is identifying both groups with near 100% accuracy, an impossible achievement.
Tenant Screening is not Perfect
In developing any tenant screening criteria, you will by definition exclude great people. You will let sub-par tenants in unknowingly. There is no perfect system, but you need a system that can be used across all prospective tenants, and is a color blind system. Credit scores and criminal records are two that pass those tests. Hopefully any criterion keeps most of the problematic people out, and does not exclude too many good ones.
With only about 10% of the people having a score below 560, a minimum of 575 probably excludes about 15% of renters. This is a small price to pay to have a minimum quality tenant base for an entire complex. 575 is still low, but it excludes much of the low-quality renters.For a complex, 575 is not great, but not terrible. In a Single family home this is still way too low. For most landlords, especially if you want your life to be easier, you want to get at least an average renter, or above.
Have you ever taken a chance on a low credit score person for a renter? Did it work out? What was their credit score?
I am not a land lord yet, but I would not take a chance with a bad credit report history. If they have no score, then I would ask for proof of rental history that they paid “on time” with cancelled checks. I hope to have a 0 score one day, and that would mean that I am not playing the dangerous fico game of having and maintaining debt.
Thank you for the comment!
Work on your score. A no-score, is a risky applicant. In the USA, you need to play the FICO score game. Charge $100 each month, and pay it off. After 6 months, you will have a 700+ credit score. Please see the part in my post about persons with a 0 credit score.
You do not need to play a dangerous credit game to have a high credit score. You do not need to carry debt from month to month and waste money on interest to have a high credit score. In fact, it is better for your score if you pay off your entire credit card balance each month.
If you want to buy a home, you will need either a decent credit score or an all-cash payment.
Thank you for the comment!
Very true. You do need a decent credit score here ion the USA to get lower rates, and even qualify for many things. But in order to get credit, you need to put up collateral. A secure Visa of Master Card is a great way to do it. Pay off the balance each month, and no interest on most secured cards.
The problem with your thought process here is that as a landlord you would deny housing to folks exactly like the ones you hope to one day be. Without playing the dangerous FICO game of having & maintaining debt responsibly, you yourself would be categorized as a risky tenant. There is no way to opt-out of having & maintaining debt, if you hope to maintain good credit. For better or worse, that’s the way the system is set up. Take it from someone who did just that for a decade and has a FICO score of 0. While in reality carrying zero debt is a good thing, in the American consumer economy and in housing, it is seen as a decidedly bad thing.
Thank you for reading. I use charge cards on nearly 100% of my spend. I get over $5K a year in rewards, and it keeps my credit score near 850, on a 300-850 scare. I never pay a single cent in interest.
You may not have a FICO score, therefore I consider you high-risk. I know less about you than someone with a 400 score, or an 800 score. Zero debt is a good thing, however no credit score is a bad thing.
Do you realize that no credit score probably costs you in terms on increased car insurance premiums and lost rewards? And sending a check for monthly electric bills and cell phone providers costs too.
I actually didn’t check my tenant’s credit score being that he’s my brother (haha), and I know my mom doesn’t check her tenant’s credit scores, either. Her suite is in an area that has a lot of retirees though, and she has an age limit on her unit because the entire complex is 25+. This helps with the quality of applicants.
Thank yo for the comment!
Older can help, but anyone can have a great streak of great renters, if all they have is an apartment or two. Once you have to get several tenants a year, and if you are in the affordable range, you need to be able to effective screen tenants to reduce risk. Hopefully you never have a bad tenant, but if you do, you quickly become a convert.
Best of luck to you and your tenants!
I like your point about the credit score being “color blind”. Bad tenants are bad tenants, regardless of color, sexual orientation, etc, etc, and credit score is fair for all.
Thank you for the comment Rich!
Exactly. And when you have a high risk tenant, you need higher rent, or higher deposits, neither of which low quality tenants have. Either way, they cost more in terms of money and headaches than an average+ quality tenant.
I would be very interested to hear your opinion of this news. Maybe it can be a future blog post. http://www.housingwire.com/articles/33445-its-official-fico-announces-new-credit-program-for-risky-borrowers
Thank you for the comment!
By definition, these are risky borrowers. Many will not even apply for credit, preferring a cash based system. But if it helps a few, that is OK. I will still rely on a solid FICO score.
There are many different situations in which a credit score of zero can occur and they can be both HIGH RISK and LOW RISK. My attitude is that one needs to DIG DEEPER.
Some reasons for a zero credit score could include:
Adults straight out of high school and/or college students or other young renters: After all people need to start somewhere when they have no rental history or no credit history for the first time! The minimum age is 21 to get a credit card unless one is 18-20 and has an independent means of paying the card Most young persons have not applied for credit yet. People in this category could be people renting for the first time, college students, etc. In this case, a higher deposit, proof of income or cosigner if available would be worth it. Look for other factors like being a good student, not a partier, take letters of reference, etc as alternative means. These are MEDIUM TO HIGH RISK TENANTS generally but again many first time renters or younger applicants can turn out to be good tenants too.
Persons who choose to live a Debt Free Lifestyle. These are often the “Credit Invisible” Such a person does not use credit cards, car loans, mortgages and has no debt and has not for at least seven years that would be reported to the credit bureaus. In this situation check for rental history, a bank statement pattern of income and expenses over a 24 month period, no bounced checks, a payment pattern of paying rent and utilities, sufficient income, etc. If a person has a long history of paying their rent and their utilities on time, is saving money, and keeps their place very nice and shows a good rental history, and a long history of living a debt free lifestyle, this could be VERY LOW RISK TENANT! If there are a lot of red flags or shows a lot of rent missed payments, AVOID OR HIGH DEPOSIT!
Tenant Applicants who moved from Overseas: These include those who move to other countries to take a job, refugees who are fleeing wars or humanitarian crises, immigrants, expats, and others. Since credit reports are often specific to one country, it is very possible that there will often be no credit history when a landlord runs their credit in another country. In these cases, one should pay more attention to their income, their job offer, their recommendations, their character, their bank accounts and if they show a consistent pattern of payments previously, any foreign credit or rental history you can find, and other assets. The risk range of tenants who moved from overseas is MEDIUM. Additional deposit may be needed in some cases for this group.
Tenant Applicants who got released from other controlled living environments for long periods of time in which no rent was charged and no credit payments were made. Examples include jails, prisons, camps, religious cults, group homes, homeless shelters, boarding houses, and similar settings. For these applicants verify income, records from the place they lived, criminal history, etc. Risk of renting to this group is MEDIUM TO HIGH.
The applicant could be previously homeless looking for a place to live. For this, additional deposit would be recommended but it is a good idea to allow them to get off the street if possible
Thank you for reading.
All great points, and I can tell you that you have never been a landlord. Unfortunately, using many of the criteria you have listed is discriminatory and subjective. And take a lot of time to verify.
I am about renting to low-risk tenants, not high-risk ones. Let a different landlord take the high-risk ones. People that are 18 can have a great credit score, it’s easy. I see it all the time.
Additional deposits do not help in a bad tenant situation. In the riskiest areas, they may be illegal. If the tenant is truly a bad tenant, they are a drop in the bucket as to what you need to recoup financially from a bad tenant. A $10K with lost rent, legal fees, and repairs would not be uncommon.
But I do see some of the others as a possible chance. I do not see a debt free lifestyle as necessarily bad and landlords should have procedure for screening th credit invisible. It could mean they paid everything off or do not want to go into debt, and are saving good amounts of money.
I also think there should be a path for those who are first time renters, those whose parents are unable to cosign, those that had financial trouble in the past, those homeless, those that had a medical emergency, or those that turned their life around after prison, those that had a medical bankruptcy, a job loss, those who moved back from a shared housing situation, etc to have a chance to get back into the housing system.