Why you should do a credit check when screening tenants
We do a credit check as part of our screening process. We believe the old way of going with a “gut” feeling is way too risky. As a property manager / landlord we have a duty to properly screen tenants to protect the quality of life of other tenants in the building or people living near the building.
When we look at an application we examine four main pillars, they are as follows:
Past and current landlords
Character references
Verification of employment or source and amount of income
Credit check
Each pillar plays an important role in the approval process, however, in this post I am going to focus on the credit check.
I still come across many property managers and landlords who do not do credit checks.
Here are some of the reasons I here for not doing a credit check:
I do not want to spend the money
Yes, it will cost you money, but it can save you money long term compared to eviction.
I do not know how to get an applicants credit report
There are several companies that you can sign up for, yes, there are some rules around privacy and handling sensitive material, however, it is generally free to sign up with a verification company, and is a pay per use, with a cost of about $25 per report. I have been signed up with a company calledwww.tenantverification.com This company has worked well for me. If you are a member of IPOANS here in Nova Scotia, you can get credit reports for about $10, or another company I know of, but have not used is called tenchek . There, now nobody has an excuse to not get a credit check.
The prospect told me they have bad credit, so I am not going to bother with a credit report
Here is the deal, the credit report is more than just about a credit score, the credit score number is only one component of the report. The report tells a story. Each time a person applys for credit they enter there current address, and phone number, also if they have even minimal credit like a credit card, they will have a payment history. You will be able to tell when if they pay there current debt obligation payments on time. You will be able to see what the companies where they applied for credit. The story could be good or really bad. If a tenant has lied about living in a certain place, it may show up. We have had tenants say, there previous address was living at home with parents, so they do not have any references. Then you find out, that the truth is they have lived in five different places in a very short time. Think of a credit report as a way to back up the information on the application.
They have a co-signer, so I will be safe if they do not pay
The purpose of a co-signer is as a plan B to collect the rent, if the tenant stops paying. I want to make it clear, that if you take on a co-signer you need to do a credit check on them too. Make sure they are able to qualify for the apartment, before you make them sign a lease. We have had co-signers that turnout to have worse credit than the one applying.
Summary
Those are the main excuses I hear for not doing a credit report. When you do run the report the credit score is also an important part. A fantastic score (which means very low default rate) is in the 7 hundreds. A red flag score would be 550 or less. The lower the score the higher the chances of default.
I do want to caution you that some cell phone companies will put unpaid phone bill into default, pretty much as soon as it is just overdue. It could be the only thing bringing down the score. You need to use common sense when you read credit reports.
Like I said the credit report is only one of the four pillars of successful applicant screening.
Being on the receiving end of a credit check or any screening process is never a fun thing. However, I do understand why it is so important, so I don’t complain about it. Landlords are renting their properties to make a living or some extra money. So, it pays to accept only tenants that you can trust to pay rent on time.