As a landlord, you have many ways you can perform background checks on potential tenants to see whether they are a good fit for a rental property. However, none is as important and illuminating as a credit check. Credit checks analyze an individual’s credit score and assign them a numerical ranking that can be useful in determining their fitness to rent a property. In a business where consistent, on-time payments are necessary for you to make a living, the way your tenants handle money is a clear indication of their ability to make rent each month. Read on to learn more about credit scores and why they’re so important in the rental business.
What’s a credit score?
Simply put, credit scores have a major effect on your financial well-being. A credit score is what allows you to qualify for a loan or mortgage or open a credit card. Think of the three digits in your credit score as a snapshot of how you handle money. A good credit score is the difference between a loan with a high interest rate and a loan with a low interest rate, or even getting a loan in the first place. Nearly everyone has a credit score ranging from 300 to 850, and depending on its numerical value, your credit may be ranked as exceptional (800-855), very good (740-799), good (670-739), fair (580-669), or poor (300-579).
How is a credit score calculated?
A credit score is derived from several different factors, all of which are weighted differently in how they contribute to your overall score. Most credit scores weigh aspects of your personal finances such as payment history, how much debt you have, how long you’ve had credit, what types of credit you have, and how much of your credit is new. If you frequently miss payments on your credit card or loans, this will harm your credit. If you always pay on time and have a long history of doing so, this will reflect positively on your credit score.
What a credit score tells you about a potential tenant
Since credit scores combine multiple aspects of someone’s personal finances, they can give you a good idea about how likely a tenant is to pay you on time. Someone with exceptional, very good, or good credit is someone who you most likely would be willing to rent to. You’d probably want to avoid someone with a fair score, unless they could produce other receipts showing their income or savings. This is because a high level of debt could mean their monthly expenses outside of rent are high, such as student loans, personal loans, and consumer debt.
How to avoid renting to someone with poor credit
Now that you know what contributes to poor credit, you should understand why as a landlord it is in your best interest to avoid a tenant with a low credit score. Performing a tenant credit check is the easiest way to avoid renting to somebody with bad credit. Some websites offer such services free to landlords, making it even simpler to make the right decision when renting your property to a new tenant. Although it’s tempting to believe a renter’s sob story, it is ultimately in your best interest to trust the numbers and protect your investment.
A tenant’s credit score is a must-have if you’re looking to rent your home or apartment to a new tenant. Credit scores combine multiple aspects of a potential renter’s fiscal habits, making it an accurate way to evaluate any financial risk they may represent. With free resources available, there’s no excuse not to get a credit check before signing a rental agreement.