Beyond the FICO Score, How to Read an Applicant’s Credit Report

Many years ago, I would run credit reports on applicants and only pay attention to their FICO scores.  We stated in our criteria that applicants must have a credit score of 725 or higher to apply for one of our rentals.  If the credit report popped up with that number or higher, I would move them to the “continue with background check” pile.  Little did I know that I was setting our company up for problems by not investigating further into their financial background and  evaluating what else was on an applicants credit report. Knowing now how to read an applicant’s credit report, I know it’s way more than just a FICO score.  Read below for the items we pay closer attention to.

With the pandemic over and most moratoriums have expired, it is more important than ever to be thorough with your rental applicant background checks.

We are proponents of education, and much of the information provided in this blog is from a refresher webinar hosted by The American Apartment Association.  If you are not familiar with them, check them out.  They have a lot of free information that we find very helpful, even as veteran landlords.

How a FICO Score is Generated:

Five areas contribute to a FICO score.

Payment History: This holds the most weight on the score, with 35% of the score based on how well payments were made per agreement.

Credit Usage: The second most important factor (30%) to a FICO score is how much available credit is used.

Length of Credit: 15% of a FICO score is generated from how long you have had established credit for each line of credit or the age of the open accounts.

New Credit Inquiries: 10% of the score measures how many hard credit inquiries or new accounts have been opened.

Credit Mix: The last 10% of the FICO score is attributed to the applicant’s various types of credit.  The more diverse, the better in this case.

Information NOT Included In A Credit Report

Income:

Where some reports will give estimates, it’s essential to get copies of the applicant’s pay stubs.  We ask for the last two.  You can also speak with their employer about this.  Any management would know the income range, which is what you can verify if not speaking with Human Resources.

When looking at the paystubs, look at the total amount paid to date.  This amount will show you if they have been getting a paycheck for the whole year from this company or not.  For example, if it’s the end of January, ask for December’s last pay stub to show income for the previous year.

When evaluating other sources of income like disability, trust funds, alimony/child support, etc., ask for proof of payment via direct deposit on bank statements and transfer notifications from the source.

Employer: 

This information is typically not found on credit reports, and if so, there is no guarantee that it’s current.  Always confirm employment with Human Resources.

Monthly Rent: 

Rare, but we are seeing more of it.  This new service is one that few landlords are offering to their tenants.  The tenants must opt-in for their landlord to report timely rent payments to credit agencies.  It’s a good opportunity for those with little credit to help build their score and financial background.

Evictions/Civil Judgements/Tax Liens: NEVER.  In 2017 the big three credit reporting agencies settled a lawsuit requiring credit reports no longer include evictions, forcible detainer, and unlawful detainer judgments, like civil judgments.  It was deemed these items do not contribute towards credit.

However, you can add this nationwide search on to most credit reports purchased for a fee.  Credit reports will not include tenants currently undergoing eviction due to timing.  This situation is why you must speak to the last TWO landlords or property managers listed on the application.

Loan Deferrals:

Never included due to the CARES Act.  Credit reports include all loans, but it is up to the applicant to provide proof of this if deferred.

Check Writing History:

If a tenant writes many bad checks to stores, you will not know.  However, if they bounce checks to credit cards, car loans, etc., you will know by looking at the payment section for each vendor as the payments would post as late.  A few credit reporting companies do include check writing as a separate report.  Below we will tell which company we use, who offers this service.

Bank Balances: 

Where this information is essential to your financial background check, the applicant must provide bank balances verification to you.  Can they be altered?  Absolutely.  But you can cross-check what is on the bank statement to what is on the credit report.  For example, are the $350 car payments made on time?  Deductions for all debts on the credit report should be found on the bank statement.  Income on direct deposit once a month or every other week?  You should find that on their bank statement too.

Now that we have discussed items not found on credit reports and how to find them elsewhere let’s focus on how to read an applicant’s credit report and why it’s more than just a FICO score.

What Items Landlords Should Be Paying Attention To On An Applicant’s Credit Report

High Debt

Focus on account balances and monthly payments.  A good credit score can mean they pay their debts on time, it does not mean they have enough money at the end of the month to afford their rent.  The higher the debt, the lower the income available to pay you.  Read the credit summary as it is the easiest way to get an overall view of their monthly credit requirements:

Total Balance = Mortgages, Revolving Credit, and Installment Payments.

Monthly Payment = Total amount of all (minimum) payments due to creditors each month to stay current.

Late Payments

This area of the credit report can include late payments, collections, charge-offs, repossessions, foreclosures, and bankruptcy.

30/60/90 below each creditor shows if there have been any late payments in the last 90 days.  The monthly bar at the bottom of each creditor shows how many payments they have made on time in the previous 1-2 years.  You’d like to see this as all green months.  You’re looking for unresolved negative trends.  Maybe last year there were several late pay items, but they have been on time this whole year.  It’s worth asking the applicant why for clarification.

If the account notates “Past Due Amount Due,” it is getting ready to be sent to collections, which is a liability.

Account Closed by Grantor

See if there are any remarks for more context.  For example, there may be an issue of a stolen credit card or their account was hacked.  Also, they may not have used the line of credit for many years, and the account went dormant, so the company closed it.  This information is not always there, but you can certainly ask the applicant why the account was closed.

Collections

Look at the type of collections it is.  Medical is quite common, but most credit agencies do not include the score.  Medical collections are like evictions and soon will no longer be applicable on credit reports.

The most crucial collection accounts are credit cards, utilities, or by a property owner.  Always research the creditor’s name to see who it is they owe.

A rental property owner or property manager could mean an unpaid judgment or damages that had exceeded the security deposit retained.

Look for when the collection was assigned.  Again, the farther back it is, the less impact it has on the report.

The current status is significant to note.  If it states paid, it shows the applicant is responsible and paid their debt.  Unpaid can mean differently, but it’s best to check with the applicant to see why not paid.

Profit/Loss Charge Off

The recent balance is the most important part to note here.  A Charge-Off is when an account goes into collection, and after many failed attempts, the company gives up and writes the amount off as bad debt.  This charge-off will stay on a credit report for seven years and damage the FICO score.

Take a minute to look at remarks, past due amount, latest activity, and most importantly, the recent balance.  The current balance is the most important to note as it is the total amount (balance + late fees) that is being written off.

Repossessions

They are also known as Reaffirmation.  Typically repossessions apply to be autos but can be a boat, motorhome, etc.   Payment status usually states “UKN,” which means “unknown.”  Once an asset has been repossessed, the credit bureau removes the payment status.  However, you can deduce the date they stopped paying by looking at the monthly payment, how much the remaining balance was, and how long they have had the loan out.

If a loan was taken out in 2016 and most of it shows paid, this issue is 3-5 years old and may no longer be a concern.  But, again, ask the applicant what happened.  Maybe there was a divorce, and the other spouse stopped paying.  Perhaps the asset was totaled in an accident, and the insurance coverage was not enough to pay the balance.  There may be reasonable explanations that the credit report may not state.

Warnings of Mismatched Information

Sometimes, a section at the bottom labeled “AKA” or “Also Known As.”  This area can refer to a person’s last name if changed like a maiden name or defining a Jr. or Sr. between father and son.

What is essential to check is the last four numbers of the SSN and the date of birth.  If the SSN of the 28-year applicant listed is correct, but the date of birth on the report states this person was born in 1959, you likely have an imposter.  We have not seen this personally but know of a family this happened to.

This area of the credit report is not always a red flag but more a heads-up to pay attention.  If concerned about the SSN, you can verify it by requesting a copy of their most current W-2 or tax return.  There are also companies online you can pay for their service to verify an SSN.  Honestly, if you get to this point, you should be asking yourself if this tenant is the best fit for your rental.

Bankruptcy

There are two forms of bankruptcy, chapter 7 and chapter 13.  Let’s discuss the differences.

Chapter 7 Bankruptcy wipes out all of a person’s debt, and after approximately 4-6 months, all debt except taxes, student loans, government support, and alimony are removed from the credit report.  Chapter 7 bankruptcy stays on a person’s credit report for ten years.  Therefore, it is essential to note the filing date of bankruptcy to determine if the applicant has recovered financially or not.

Chapter 13 does not wipe out all debt, and the debtor gets an opportunity to restructure finances and pay back all monies owed.  They also get to keep assets such as a car or home.  This restructure typically takes 3-5 years to complete and stays on a credit report for seven years.  However, chapter 13 affects how the applicant can pay rent as the restructured debt is still a liability.

Inquiries

This significant area will show how many lines of credit the applicant has applied for in recent months.   Credit checks by landlords are soft pulls and are not typically included in inquiries.  Usually, this would be for auto loans, credit cards, etc.  The number of inquiries will affect their FICO score under the new credit section.

Are you understanding that a rental applicants financial strength goes deeper than a credit score? Keep reading to finish learning how to read an applicants credit report.

Other Items to Note

✅Look at previous addresses to verify they match what’s listed on the application.  They should match those listed in theory, but this is often not the case.  Unless the applicant formally changes their address with their creditors to the new address each time they move, they may not be noted on the credit report.  A college student likely has their credit card registered to their home address, but they will list their previous address and landlord for verification.  If you cannot determine how the addresses match up to the applicant, ask them.  There is likely a reasonable explanation.

🚫Allowing the applicant to provide a credit report to you is a big NO-NO.  If you live in a state like New York, where landlords have to accept the credit report from the applicant when provided, smile and say, “thank you.”  Then go and run your own credit report and pay for it yourself.  It is way too easy for sketchy applicants to alter documents these days.  Can they modify all requested documents?  Sure.  If you run your own report, you’ll be able to verify the date of birth.  You will also be able to compare it to the application you provided.

🚫Accepting or using Credit Karma reports is not a great idea.  They use a different model to create their credit score, and it’s often not accurate.  Its credit score number is typically higher for the holder.  FICO  & Vantage scores are more strict and designed specifically for housing.  They are often lower than the applicant believes because of this strictness.

Who We Use to Process Our Credit Reports and Why

We have been running credit reports for over 15 years.  When we first started, we were members of our local apartment association, and we had a link through them we could use to run credit reports.  Another business bought out that linked company, and somehow, we landed upon TenantAlert.  We are not one for change, but it was one of the best business transitions we made as landlords.  When we run credit reports on applicants, we use TenantAlert* Here is why:

• Their reports are instant.
• We can pay for the reports ourselves or have the applicant pay by sending them a payment link.
• They have all reports available to “add on” to our general credit report. For example, we like to add criminal and eviction searches.
• We can integrate the report into our application online and on our website.
• They include bad check analysis and identity red flags, which most credit agencies do not offer.
• You can have up to 4 applicants on one order, with a discount for the additional applicants.
• They provide a scoring system based on ALL items in the report, which tells you if the applicant is financially a safe bet for you. WE LOVE THIS!
• Their reports are easy to read and formulated with summaries to make it quick to look at monthly debt and determine if their income to debt ratio is too high to cover your asking rent.
• They offer a lease guarantee insurance policy you can purchase. The minimum cost is very reasonable!

Tenant Alert Was Created Made For Landlords

We often have free offers to use other sources to process credit reports.  Many rental property association memberships include complimentary credit reports, but we always use Tenant Alert because we know their background is intended for landlords evaluating tenants.  Their prices are very reasonable, and their customer service is easy to contact with any questions or concerns.    They also offer reports for employees, so if you are looking to hire a manager to work your multi-family complex, use their employee background service.  There are many more services offered, from online applications to document storage.  For a pdf on all the services they offer, click here.  To register for a free account, click here*.

*We may receive a small commission should you pay for their services

We hope this guide has given you a better understanding to what is included in a credit report and what red flags to be aware of.  Knowing how to read an applicants credit report will help secure a more valuable tenant.   Run your business professionally, learn how to do new tasks, and feel confident in the tenants you select.

Please leave us a comment letting us know what you think of our blogs!  Questions? Contact us at Stacie@YourLandlordResource.com OR Kevin@YourLandlordResource.com.

Check out our other blogs to guide you on your self-management journey as a landlord:

5 Spring Maintenance Items to Do For Your Rental Property

Our Top 10 Rental Property Repairs

How to Cope With Inherited Tenants

Meet Stacie & Kevin, Your Landlord Resource

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