Tenant Screening - Beyond the Credit Score

One of the most important parts of any tenant screening process is evaluating a tenant’s credit. Many Las Vegas property management companies and many individual owners leasing out their units set a minimum credit score for qualification. There is nothing wrong with having a minimum credit score, but evaluating a tenant’s credit simply by referencing their credit score is a lot like choosing a car because it has a nice paint job; in order to really know what you are buying, you have to look under the hood just to make sure.  There can be vast differences between two applicants with the exact same credit score. Therefore, it is important to understand what a credit score is, and what things to look for in a credit report.

What is a credit score and how is it determined?

A credit score is a three-digit number that is supposed to represent a person’s credit worthiness. Credit scores typically range from 300-850. Commonly, people’s credit scores fall between 500 and 800. Credit scores are determined based on an algorithm. The algorithm takes into account numerous factors including an applicant’s payment history, credit utilization, credit mix (the type of tradelines they have opened), length of credit history, and recent credit inquiries. Some of the most popular algorithms for evaluating credit in property management are the Vantage™ score and the FICO™ score. 

What are the pros and cons of a credit score?

People use credit scores, in general, because they are an easy way of determining if someone is a “good” or “bad” credit risk. Specifically, for property management, credit scores help determine not only if a tenant might pay rent, but whether they will pay it on time. When looking at a credit score, the base assumption is that past performance is the best indicator for future behavior. Accordingly, someone with a good credit history is more likely to pay bills on time, and someone with a bad credit history is more likely to default. The score itself, however, cannot tell you everything. As noted, a credit score is simply based on an algorithm. The most popular credit algorithms take into account a large amount of statistical data in order to help determine what applicants are more likely to pose a poor credit card. Nevertheless, no algorithm can tell you why someone has a poor credit history, and whether the factors that caused the poor credit history continue. Moreover, the algorithms generating credit scores are not perfect by any means and can be somewhat of a black box, as each credit model guards their exact formula, and sometimes scores do not correlate with what is seen on the credit report. Sometimes, people with almost the same credit profile will have highly different scores.

So, beyond the credit score, what should a property manager evaluate?

When screening an application, a good property manager or landlord should look at the actual credit report, not just the credit score. Some, but not all, of the items that should be taken into consideration are an applicant’s credit depth, actual credit limits and balances, and, if there is derogatory credit, the nature and resolution of that credit. 

• Credit Depth – Credit depth refers to the amount tradelines on a person’s credit report and how long those tradelines have been open. To gauge how reliable a score might be, it is important to look at an applicant’s credit depth. Applicants who have a lack of credit depth can have scores that vary wildly based on the algorithm. Between two applicants with a 700 credit score (considered good credit), an applicant who has only one tradeline open for one year, is generally a less reliable credit risk than an applicant who has multiple tradelines established over many years. 

• Credit limits and balances – One factor that most credit scores take into consideration is the ratio of credit limits to available balances. Having a high ratio can signal that an applicant is over extended and living off of credit, making them more likely to default. It is, however, important to look at the overall picture. For example, a prospective tenant who has credit cards with low credit limits that are almost maxed out and recently bought a new car may have a very high ratio, but may represent a better credit risk than someone with both high available credit card limits and high balances, even when the ratio is lower, due to the absolute amount of credit card debt they are carrying.

• Derogatory Credit – Negative credit can come in many forms, from late payments to collections and charge-offs. All of these will lower an individual’s credit score, but it is important to look at the nature of these items. Good tenants can sometimes have blemishes on their credit. When reviewing negative credit, it is important to be able to identify and evaluate the nature of the derogatory credit. For example, how old is the negative credit? Does the applicant’s credit report show that the applicant went through a “rough patch” but has had good credit since, or is there a pattern of missed payments and collections over a long period of time? What is the type of account? Missing car payments, for example, might signal a much larger problem than having a medical bill collection. Was the derogatory account paid off or does it still have a balance? The answers to these questions, can help a property manager or landlord determine if an applicant with less than perfect credit is worth the risk. 

It is important to be able to evaluate the credit report itself, not just the credit score, when screening tenants.  Further, the credit report must be taken into context with other factors, such as an applicant’s income and rental history. As an experienced property management company in the Las Vegas valley, iProperties has the knowledge and experience to do just that. We take a holistic approach to finding the best tenants in the least amount of time. If you are struggling to place a good tenant in your property, we would be happy to discuss our screening process and how we can put our experience to work for you.