How to Do a Credit Check
After narrowing the field of applicants based upon the information in rental applications, you are now ready to do credit checks. Why is this step necessary? A credit report gives you a good indication of how responsible each prospect is when it comes to handling money. It's more difficult today, however, because so many people have had homes foreclosed or bankruptcies, job losses, and medical bills they cannot pay because they don't have health insurance.
Some landlords want to give the family a break. Others believe you should stick to your standards for qualifying tenants and that it's better to keep the unit vacant until a qualified renter comes along.
If you decide to take the risk, carefully scrutinize the credit report to find out if the prospect has a long history of not paying bills or if it started with a mortgage that became unaffordable or medical expenses that tipped the scale.
Credit reports will tell you if a person pays rent and bills on time, was evicted (this information may not be available in some states), is involved in a lawsuit, and whether he has a credit history. Keep in mind, however, that credit bureaus make mistakes and some reports may contain inaccuracies.
If you decide to relax your standards on credit checks, do it consistently. If you forgive someone whose only black mark is an ongoing hospital debt, be sure that's the criteria you use if someone in similar circumstances applies for the vacancy. Otherwise you set yourself up for a discrimination complaint.
What's Involved in a Credit Check
Credit ratings are based on an individual's credit-paying history, the amount of money owed, the length of the credit history, new credit, and types of credit used. The report will give you specific information about the applicant's bank loans, credit card accounts, real estate loan payments, student loans, bankruptcies, and accounts in collection.
The data is given a numerical score ranging from 300 to 850. The higher the score, the more likely an individual is to pay bills in full and on time. Most people have a score in the 700 range.
The following chart will help you interpret the score an applicant receives:
Credit Score |
Delinquency Rate |
800–850 |
1% |
750–799 |
2% |
700–749 |
5% |
650–699 |
15% |
600–649 |
31% |
550–599 |
51% |
500–549 |
71% |
300–499 |
87% |
Getting an Applicant's Credit Report
You can join one of three national credit-checking agencies by paying an annual fee. They also charge for each credit check, approximately $50, and there's a small additional amount if you want the applicant's credit score. You'll get the information quickly, within minutes or a few hours. The three national agencies are Equifax Credit Information Systems, Experian (formerly TRW Information Services), and TransUnion.
A cheaper way to get a credit history is by joining a credit union or the rental property owners association in your area. They also charge a fee, but much less than the national services. You can also check credit histories online for a small fee, typically under $20. One service is Rental Housing On Line (RHOL).
You can also call banks, stores issuing credit cards, and finance companies individually (they'll be listed on the rental application) and find out whether your applicant has paid the bills on time each month. Information about bankruptcies is public record and available at your local courthouse.
If you reject an applicant based on his credit history, you should inform the applicant and in your rejection letter state where you got the credit information. Federal law requires that you give the reporting agency's name, address, and phone number and tell the applicant that he has the right to obtain a free credit report from that agency within 60 days, and can dispute the information in the report if it's inaccurate or incomplete.
If you eliminate a prospective tenant based upon a credit report, federal law requires you to give that person the name and address of the credit agency upon which you based your decision. That way she has an opportunity to contest what may be inaccurate data.
Charging Fees for Credit Checks
Some states now allow landlords to charge a prospective tenant a reasonable fee to cover the cost of getting a credit report, so the money doesn't come out of the landlord's pocket. Find out if your state will allow you to charge tenants and whether there is a limit on how much you can charge.
If you decide to charge a fee, you should let your prospects know that paying it does not guarantee that they will get the unit. Also tell them that selecting a tenant is a process of elimination and only the finalists will have their credit checked, therefore the fee may be refundable.
Be sure they understand that fees paid by the finalists are not refundable. Tell them you will mail the uncashed checks to those who don't make it to the final round. Put your policy in writing on the rental application and also explain it to applicants when they fill the form out.
What If They All Have Bad Credit?
You want to select a tenant who does not have a lot of debt and who habitually pays bills on time. If your choices are limited, however, because everyone who looked at the apartment has only a fair or poor credit rating, then be sure to talk to previous landlords. Ask if the tenant regularly paid rent in full and on time. Ask how much rent the tenant paid. Does it match what the applicant wrote down?
When credit ratings are fair or poor, you should also verify what they've said about having a savings and checking account.
You can require people with poor credit histories to have a cosigner whose credit record is better. You can also require a cosigner if the applicant is too young to have built up a credit history.
If you select a tenant with poor credit, be sure to get as much of a security deposit as your state law permits. In Michigan, for example, the maximum security deposit is one-and-a-half times a month's rent — so if rent is $500 per month, then the security deposit cannot be greater than $750.
Typically, rent payments should be about a third of a person's gross monthly income. Keep in mind, however, that some prospects may be getting rent subsidies from state or federal sources. If they are, the amount they get has to be factored into your calculations. You cannot discriminate with regard to the source of a tenant's income.
The last thing you should consider in looking at credit reports is whether the applicant is doing something to improve her credit rating. Since the information provided goes back seven to ten years, you can easily see whether the applicant is trying to improve the rating by paying off old debts. Take such things into account when making your decision about the best tenant for your unit.
Report Results to Applicant
Applicants who are rejected because of their credit reports must be notified of your decision by letter. The letter should state why they were eliminated and what the basis was for your decision. You must also send a letter to an applicant if you conditionally accept her as tenant. Conditional acceptance means that you want a third party to guarantee the lease before you approve it. These notifications are requirements of the Fair Credit Reporting Act (FCRA).
