Why Using Credit Scores To Qualify Can Be A Big Mistake
I know the title of this articles goes against commonly held wisdom when it comes to qualifying tenants, but as the owner of a Tampa Property Management company, I've learned the hard way this is not always true. Of course, having a high credit score is an excellent sign of a responsible tenant, but there is more to the story.
If you are a Tampa property manager or anywhere in the US, you should take a closer look at the credit report.It takes some time to get familiar with exactly what I mean, but it is worth the effort. I've noticed about 5-10% of rental applications that come across my desk with low or no credit scores paint a very positive story about the tenant if you know how to interpret the credit report.
Enter Here are a few examples; you will see credit reports with no credit score.I just approved one of those today.At first glance, I'm skeptical of no credit score because that typically means someone is using an invalid social security number.
However, I always make a point to look at the trade lines to first see what type and how they pay.Trade lines are credit accounts on the person's report. If I see no trade lines, I'm 95% sure they are using an invalid social security number.Certainly, some people do not use credit, but they are just a tiny percentage (let's say 5%) it is not worth taking the risk.
The one I approved today had 12 trade lines.Twelve!!I looked to see what the balances were and how many late payments.Each line had zero balance due and no late payments.In other words, this person had used credit quite responsibly in the past but had stopped in the last couple of years.The applicant was applying for a working-class home, and in my opinion, had perfect credit.
I approved this tenant on the spot after verifying rental history, job history, and found nothing on their criminal background.For this type of rental, this was a "Gold Standard" tenant.However, if you were a landlord who only cares about credit score, you would have passed on this application.How long did this extra analysis take? … about 30 seconds.
Another typical example is someone with a low credit score in the 500's or low 600's with one or two small trade lines in collections.I would probably pass if the application were for a middle-income neighborhood, but I look deeper in the working class.If they owe money to a utility, I pass.If they owe money to medical or something minor like an insurance company, I give them a chance.If everything else checks out, I will probably approve them.
The reason for this is that most people are not checking their credit reports regularly and many people do not use their credit that much.It is very easy for something to show up on their credit report that's in collections for $145 or $200 that they were not aware of.The key is looking at their active trade lines to see if they are paying their bills.If the rest of credit looks good, then I figure they didn't know about it.
A final typical example is having a couple of late payments.The rental applicant has nothing in collections but was late on a couple of payments to a single creditor.Did you know the credit score drops 100 points instantly when you receive a single late payment on your credit report?If you had a bad month and forgot a couple of payments and paid late, your score could quickly drop 150 points.
The key when looking at credit reports is to examine why the score is low.If they are not paying any of their bills and everything is in collections, you should pass, and that will be the case 90% of the time.However, the other 10% is often gold, if you take the time to look deeper.
Now I know a lot of landlords might say, "I don't care.I found great results with people with good credit scores and I'm not changing."I can understand that belief but let me pose a couple of questions…. which one is more likely to buy a house?Someone with excellent credit or someone with a few blemishes that pay their bills?Which one is more likely to stay in your rental the longest?
Food for thought…your text here ...