Why do we care about Credit Records and Credit Score? A credit is score is an indicator of the probability of a default, nothing more. It will show if the person has been responsible with their finances. If a person is responsible with their finances, odds are, they are also responsible with the rest of their lives. A credit score of 700 or better, indicates a solid person. A credit score below 600, indicates a person with some issues, maybe permanent, maybe temporary.
The credit report will also show payment history, past addresses, recent credit inquires, and judgments.
Previous addresses on Credit Report should match the application. If your applicant has two or more address on the credit report in the past five years, that could indicate a problem. They are constantly being asked to leave, or leases not renewed. They may be a complainer, and nothing satisfies them so they move. They move in with roommates, or roommates move in with them, and they get a new address. Watch for new roommates in your unit. Or there could be a good reason. Find out.
Judgments indicate payout order. If you are not the first judgment, you probably will not get paid in bankruptcy or garnishment. The applicant should have more good accounts than bad accounts, especially recently. Look at the derogatory account names for landlord defaults and apartment names, etc. If the collection companies do not sound familiar, Google the name to see what type of business they are in.
Look at other credit inquiries. An applicant that has been recently rejected by other housing agencies will have those housing inquires listed. If other places are rejecting them, and you are considering them, ask yourself if you are prepared to take on the risk cases other places do not.
Look for small payments defaulting. If they can’t pay Pizza Hut $65, how are they going to pay you rent?
With bad credit and previous judgments, if a renter pays, it is not a problem. As long as you stay on top of them, you will only lose one month’s rent before you evict or terminate their lease and get your unit back. That’s what a deposit should cover. With bad credit, if the renter leaves without paying rent, you will never get it. If they cause damages, you are stuck with the costs.
With a 600 – 650 credit score, the odds of a mortgage (and rent?) default are 31%. When you take that down to 550 – 599, the odds go well against your favor to 51%. Bringing a credit score down to 500 – 549 requires work on the borrower’s part, and you can predict a 71% default rate. Below 500, you have a 71+% chance of default. Remember, these are mortgage statistics. Rent is a lot easier so skip out on than a mortgage.
Do yourself a favor and eliminate a lot of work by creating a unit where desirable tenants want to live. Finding tenants with 700+ credit scores is not difficult. Getting them to sign a lease and live at your property is. That will start to change when you have good units, and good neighbors.