Endless arguments with your tenants over unpaid rent and the enforcement of eviction lawsuits are the last thing you want to see!
In your quest to separate the risky tenants from the safe ones, it's always wise to conduct onecredit checkon every applicant. It is a fundamental part of the tenant screening process. It pays for itself over time by helping you identify quality candidates—candidates who make rent payments like clockwork.
While these reviews provide valuable insight into potential renters, even seasoned landlords can miss important details. So it's always worth remembering what to look for when evaluating credit reports. This allows you to quickly locate the red flags and easily identify a solid tenant.
SingleKey offers landlords a great way to verify tenants through our. We've helped rental companies across Canada screen and verify thousands of potential renters by providing valuable details that make renting a far less risky and hassle-free experience. To help you read the SingleKey Tenant Screening report, let's look at the top 5 tenant credit check metrics.
Don't forget to check out our sample tenant credit check report. We will use it for reference in this article.
How to read a landlord credit report: 6 essential tips
1. Know the difference between bad, good and good credit
The first indicator to check is the applicant's creditworthiness. This financial metric measures their creditworthiness, or risk of lending them money. In Canada, credit scores range from 300 to 900, with the average being around 630.
Although primarily used by lenders, a credit score is also valuable information for landlords. It paints an accurate picture of a tenant's history with credit and how responsible they are when it comes to making payments.
In Canada, two private companies assign credit ratings to individuals: Equifax and TransUnion. Both organizations collect and store borrowers' credit data and integrate it with complex scoring models to calculate their scores.
When an applicant has good credit, they manage debt responsibly and make payments on time. This is of course a positive trait as they will have little or no trouble paying their rent on time.
On the other hand, a low credit score indicates that the applicant has had a history of poor debt management and is more likely to default on their payment obligations. As a result, you should think twice about offering them a lease as they can easily fall behind on their rent.
Since the average Canadian has a credit score of 630, you should investigate rental applicants with scores below this number more closely. A credit score below 500 is likely due to excessive debt, numerous missed payments, or recent bankruptcy, indicating a high-risk applicant.
SingleKey uses an Equifax ER 2.0 score to create an accurate profile of a tenant's financial health. Here's a snapshot of what to expect from each report:
While a low credit score doesn't mean a tenant will default on their rent, it's safe to assume that a tenant who doesn't pay their bills on time is more likely to not pay their rent on time.
2. Evaluate the tenant's payment habits
As a landlord, you want tenants who are conscientious about keeping up with their rent payments, so you want to take a look at their payment history.
Lenders report consumer debt payments to Equifax and TransUnion, whether late, on time, or missed entirely. Thus, all of them affect an applicant's credit report.
Specific sections of our report that relate to an applicant's payment history include:
- Overdue amount– the amount they owe on one or more specific credit accounts.
- Payments 30/60/90– how often they made a payment late by 30 days, 60 days and 90 days.
- payment status- Shows whether they are current or behind on their payments.
- last payment- Shows the date of the last payment.
3. Identify the type of debt the tenant owes
Another important detail in our credit report is the type of debt an applicant is responsible for servicing. While an immense burden of debt of any kind can be unsettling, it's important to understand that not all debt is created equal. Some debt securities are inherently riskier than others.
High-interest debt carries greater risk because the tenant can quickly become overwhelmed with interest charges and struggle to make payments on time. Lenders typically charge high interest rates on loans where the borrower has not pledged any asset as collateral.
Examples include credit cards, payday loans, and unsecured lines of credit.
Low-interest external financing represents a significantly lower risk for the tenant. Since they only incur little interest, the payment of debts is more manageable. Additionally, an asset typically backs these loans, providing an extra layer of security in the event the tenant defaults.
Examples of low-interest debt include mortgages, home equity loans, and car loans.
4. Add up the tenant's monthly debt payments
Credit reports describe the number of recurring payments a person has to make for a car loan, credit card, cell phone, etc. It's important to review these monthly payments because you can identify what percentage of the applicant's income goes towards covering recurring expenses and bills.
For example, in SingleKey's sample credit report, the "Payment Term Amount" shows how much the applicant must pay, and the "Narrative" explains the frequency of payments
Of course, the higher their debt load, the more likely they are to run into problems making payments on time, increasing your risk as a landlord.
For example, suppose an applicant makes $3,000 a month before taxes but pays $1,000 in credit card and car loan payments each month. Then they have little money left to cover rent and living expenses.
5. Calculate the rent to income ratio
It is important to know if an applicant can afford to rent your unit. Therefore, you should examine your monthly income and determine what percentage would cover the rent.
Luckily, SingleKey's renter credit report calculates the rent-to-income ratio for each applicant, so you don't have to worry about calculating the numbers.
By evaluating tenants' rent-to-income ratio, you can gauge affordability. If an applicant makes $3,000 a month but is applying to rent a unit that costs $2,000 a month, that's a red flag.
Many landlords prefer to rent to tenants with a rent-to-income ratio of no more than 30%. This number is a good rule of thumb to consider when deciding whether or not to consider a particular applicant.
However, studies show that the 30% threshold is not achievable for many people. As a result, it's not uncommon for landlords to accept this50% or more rent-to-income ratio.
Nonetheless, our data shows that affordability is one of the most important predictors of rent defaults by tenants. When renters spend more than 50% of their income on rent, they risk not having enough funds to make rent payments. In this scenario, unexpected expenses or job loss would cause the tenant to stop paying rent. So it's wise to be patient and look for tenants with rates closer to 30%.
We also recommend going one step further and using the(rent + debt payments) to income ratio.With this formula, you combine the tenant's monthly debt obligations and rent to better capture how much they can afford.
6. Focus on derogatory marks
A disparaging grade is a negative point on a credit report that has a significant long-term financial impact on an individual's creditworthiness.
Here are some scenarios that may cause one to appear on an applicant's credit report
- Your credit card provider has charged an overdue amount
- They filed for bankruptcy
- A creditor has sent his invoice to a collection agency
- A creditor has repossessed his home or car due to a default in payment
Disparaging grades may remain between individuals' credit reportsthree and seven years, depending on the type of item and the province they are in.
As they happen, it's important to put things in context and ask the right questions when you spot them on an applicant's credit report.
1. What was the amount owed?
The amount owed will determine how detrimental the outstanding payment is to the applicant. A small depreciation is not as worrisome as a large one
2. How old is the default?
A bankruptcy that happened five years ago is not as ruinous as one that happened recently. The more years that have passed since the bankruptcy, the lower the financial burden on the applicant should be at the moment.
3. What type of debt was it?
When a collection object relates to a payday loan, that's a lot more worrisome than when it's tied to an outstanding phone bill.
Find the right applicant with Single Key's tenant information
Being smart about your tenant screening process will drastically reduce the risks that come with renting. A good tenant not only has a stable income but also a reassuring financial history, so it's important to check these details.
By considering the 5 key risk indicators in this guide, you can get the most out of your tenant report and spot any red flags to be aware of.
If you're looking for the best tool to screen your tenants, consider thisCredit and reliability check for SingleKey tenantsReport. The five metrics we just reviewed are at the top of each report.
Don't forget that we also offer a free tenant assessment call to walk you through the tenant report resultsBook a call with us anytime.