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How to Thoroughly Evaluate a Prospective Tenant’s Credit

Good tenants are hard to come by. Our “How to Thoroughly Evaluate a Prospective Tenant’s Credit” makes it easier. One of the biggest problems when evaluating a prospective tenant occurs when the prospect acts like the perfect candidate. But, appearances may appear deceiving.


How to Screen Your Potential Tenants


In order to evaluate a potential tenant’s credit requires screening. Properly screening potential tenants makes the difference between profits and losses.

Here’s what to look for in a potential tenant:

Financial information like credit cards and bank accounts where the balances and minimum monthly payments give you a picture of financial health. High debts and high monthly payments give you insight into the ability to pay the rent promptly.

Current income shows if the rent gets covered along with normal living expenses.

How do you get this information?


Run a Credit Check to Evaluate Prospective Tenants


A credit check involves getting a credit report which keeps track of everyone’s payment history for things like auto loans, credit cards, student loans, mortgages, and other regular debts.

It also includes payment history with landlords and if collection agencies reported bad debts and any bankruptcies.

A credit report also provides a “Credit Score” which gives an algorithm result of the person’s credit and payment history.

The credit score result appears at the top of the credit report. Many credit scores contain the lowest number (like 300) with the highest number of 850. The higher the score the better the risk of loaning money to this person.

California allows landlords to charge prospective tenants up to $35 to get a credit report and do a background check. California Civil Code Section 1950.6

This law requires you to give the prospect an itemized receipt when you collect an application screening fee.

The same law requires you to give the prospective tenant a copy of the credit check report if requested.

Credit checks go back 7 to 10 years of credit history. Order a credit check report and a credit score from one of the credit bureaus like the Equifax Identity Report.

Here’s what to look for in the credit report:

Credit History – Read the late payments history, collection accounts, charged off credit card accounts, and bankruptcy. Maybe one or two late payments may not bother you, but, a pattern of late payments should raise alarms.

Current Debt – An applicant who maxes out all the credit cards, carries hefty loans, or you see many unpaid balances, shows a problem paying the rent on time.

Back these facts up by contacting past landlords and ask them if:

  • The tenant owed any outstanding debts?; and
  • The tenant maintained a history of late payments?


U.S. Credit Bureaus


Only three credit bureaus exist in the U.S. Each one offers tenant screening services allowing you to get a credit report on potential tenants.

Here’s a summary for each credit bureau:

Equifax requires landlords to go through the National Association of Independent Landlords to pay a $15.95 fee for the credit report. A complete criminal background check costs $29.95.

TransUnion charges $30 for their credit report, credit score, and criminal background check.

Experian no fee charged for landlords to request a potential tenant credit check.

Another alternative allows you to receive all three credit bureau credit checks at once. CreditReport.com which helps in case one bureau maintains different records than the others.


What Steps to Take before Running a Credit Check


Take these steps before requesting a credit check on a potential tenant.

Complete Rental Application – Get your potential tenant to sign a complete rental application which includes permission to obtain a credit check. Make sure your applicant is at least 18 years old. Provide the same application form to every applicant. This form must ask for:

  • Full name;
  • Birthdate;
  • Social Security number;
  • Previous addresses; and
  • Landlord contact information for the past two or three years.

Also, the form must include a statement that you intend to get a credit check on the applicant. Get the applicant to sign and date a consent to allow you to run a credit check.

Credit Check Fee – Charge every applicant a credit check fee that covers the credit bureau credit report.


How to Read a Credit Report to Evaluate Prospective Tenants


Negative Items – The first page of the credit report normally contains negative or potentially negative items. These include collections, accounts past due, or debts discharged.

Individual Loans and Credit Accounts – Look at every account for late payments. Credit reports state of an account is current and if late payments occurred and how many times. They also list how late the payments occurred like 30 days or 60 days, etc.

Eviction, Bankruptcy, or Foreclosure on a Home – Typical credit reports contain a Negative Items section. You must also look at the itemized list of accounts at later pages in the report which makes negative indications.


How to Decide between a Good or a Bad Tenant?


People judged by past behaviors to predict future behavior. An applicant with a history of late payments or failing to pay bills should ring warning bells. You do not want a tenant who pays late or not at all!

Yes, people do change. Old late payments followed up with consistent on-time payments may forgive past grievances. One time mistakes never repeated shows the applicant adjusted his or her past behavior for the better.

For instance, an applicant who filed for bankruptcy four or five years ago. He or she since established new credit and pays all bills promptly with no more blemishes in the credit report. A reformed applicant?

Better than one who went through bankruptcy and since still fails to pay bills on time and shows collection accounts from past landlords.


How to Interview Potential Tenants


After getting a credit report, past landlord information, and/or criminal background checks it’s time to interview potential applicants you like so far.

Forbes recommends holding in-person interviews. That’s because credit scores alone shouldn’t be the only factor to decide whether to rent or not.

Looking at an applicant in the eye and calling the references should give you a feeling about the tone of the engagement. Do you feel good about this applicant?

Also, make sure to screen and interview all applicants. Most tenants do not rent alone. They may live with a spouse, a partner, or a roommate. Too many times landlords only screen and interview the main applicant. That’s a mistake. It only takes one bad apple to ruin the lot.

Screening and interviewing all co-applicants over the age of 18 gives you a full picture of the people who want to rent from you.

The most important questions to ask during an applicant’s interview include:

  • Ever been late paying the rent?; and
  • Ever had a problem getting a security deposit refunded after moving out?

The honesty of your potential tenant appears with the answer to these questions.

Compare them with the credit report and what past landlords told you. If the applicant lies to you that should be a good reason to not rent.

Also, be careful of violating state and federal laws preventing housing discrimination. Don’t ask questions which violate the Fair Housing Act like discrimination based on:

  • Color;
  • National origin;
  • Religion;
  • Race;
  • Family status;
  • Disability; or
  • Sex.


Use a Third-Party Service to Evaluate a Potential Tenant’s Credit


Too many hassles with running and understanding credit reports, credit scores, and background checks?

Afraid of accidentally violating a fair housing law when interviewing prospective tenants?


We Know How to Thoroughly Evaluate a Prospective Tenant’s Credit


Contact Us for professional property management services in the Greater San Diego area. We know how to screen potential tenants to find good tenants and avoid bad tenants.


Steven Rich, MBA – Guest Blogger


We hope you enjoyed “How to Thoroughly Evaluate a Prospective Tenant’s Credit”. For more property management articles check out our blogs here.


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