How to Interpret a Credit Report: The Factors That Matter Most

| November 12, 2012 More

How to interpret a credit report

By Ami Noss, All Property Management

When it comes to screening tenants, running a credit check is an important part of the process. However, interpreting the results of the report may not be as straightforward as you might think. Here are some things to keep in mind when reviewing credit report data.

Understanding FICO Scores

All three major credit bureaus—Experian, TransUnion, and Equifax—use the FICO scoring system to give an overview of a person’s credit. While they don’t tell the whole story, understanding FICO score ranges is an obvious place to start. These scores range from 300 to 850, and break down as follows:

  • 760+: Excellent
  • 700-759: Great
  • 660-699: Good
  • 620-659: Average
  • 580-619: Poor
  • 579 and below: Very Poor

In determining a person’s score, FICO weights the following factors:

  • Payment history: 35%
  • Amounts owed: 30%
  • Length of credit history: 15%
  • New credit: 10%
  • Types of credit used: 10%

According to FICO.com, those with scores of 700 or higher have only a 2% chance of defaulting on payments, while those with scores of less than 600 have a 43% chance of defaulting. Given these statistics, many landlords choose to rent to those with average credit or better, with 700 being the gold standard and 620-650 being the minimum acceptable score.

Finding Red Flags

If you run a potential tenant’s credit report and find the results to be borderline, it can be a good idea to look into the reasons for the low score. Your goal is to determine if the issues that have caused your applicant’s credit score to degrade are strong indicators you’ll find it difficult to collect rent in a timely manner. Red flags include:

  • Late bill payments: If your potential tenant chronically pays his or her monthly bills late—or has had several late pays within the last few months—you can likely count on frequent delays in receiving rent checks.
  • Multiple credit cards and high card debt: Taken together, these factors likely indicate that your applicant has trouble living within his or her means.
  • Pending bankruptcies: While a potential tenant with a bankruptcy a year or more in his or her past may actually be a good credit risk despite a low credit score, a potential tenant with a bankruptcy in process is a different story.
  • Outstanding tax liens: If your applicant has an unpaid tax lien, the government has priority on his or her assets in the event of a bankruptcy.

Possible Exceptions

Keep in mind that in order to comply with Fair Housing guidelines, you have to evaluate all applicants against the same criteria. However, when you outline your requirements to potential tenants, you may stipulate that “Credit scores below X will be evaluated on a case-by-case basis.” You might then choose to overlook a low credit score if any of the following things appear on the report:

  • Medical bills: If your applicant has a history of late payments on medical bills, or high outstanding balances owed, this may be more a matter of unfortunate circumstances than an indicator of the potential tenant’s general ability and desire to pay his or her bills on time.
  • Lack of credit history: If your applicant hasn’t made much use of credit in the past—instead choosing to pay for things with cash—this will negatively impact his or her credit score. While a “thin file” won’t typically drive a credit score down to questionable levels, lack of history could have the effect of magnifying other minor issues.
  • Recent foreclosures: In the current housing market, many homeowners are so far underwater on their loans that they have little hope of ever breaking even on their investments. In some cases, it actually makes the most sense financially for these owners to walk away from their properties. If a potential tenant has a stable job history and an outstanding credit history aside from the foreclosure, he or she is probably a good credit risk.
  • Past bankruptcies: Bankruptcies generally remain on credit reports seven to ten years. If your applicant has turned things around financially after a bankruptcy that occurred years in the past, you may want to look past this element of his or her history.

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Category: Tenant Screening

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