One of Synergy’s main tenets for granting approval to prospective tenants is the widely discussed credit score. This is done to protect the owner from the chance of a premature vacancy and to ensure a responsible tenant inhabits the unit. Using the objective FICO credit score as part of the screening process also shows an attempt to follow Fair Housing guidelines and could prevent a discrimination charge. Now you may be asking yourself, “Just what composes a credit score?” The three digit score contains many variables that must be examined closer to be able to form an educated opinion of the prospective tenant.
The first and largest component of the credit score is the payment history (35%). This is not surprising as paying your bills on time should be rated highly. This is a critical component for owners of residential property because a person who has consistently paid his bills will likely continue to do in the future, barring an unforeseen crisis.
The second largest component is the ratio of credit available to credit used (30%). This component is important to property owners because a tenant who has maxed out his available credit may be teetering on the edge of bankruptcy. This shows an inability to prudently handle credit and could be a warning sign of future problems.
It must be noted that these first two components make up a disproportionate 65% of the credit score. The last three components make up the remaining 35% and are weighted as follows: Length of credit history (15%), Variety of Credit (10%), and number of inquires into the credit score (10%). A long credit history will show that a tenant has been responsible for an extended period of time, withstanding possible downturns in the economy while maintaining his/her credit. Likewise, having a variety of credit will show experience handling various types of loans and bills. Finally, one must be wary of a tenant who has too many recent inquiries into obtaining new credit. This person may be seeking a life preserver to pay off other high debts.
Now that you have a good understanding of the composition of a credit score let’s go into how to analyze the score and the caveats involved. First, it must be noted that one must look at the whole credit report rather than just relying on the number. A person’s score can get downgraded for many things, including for circumstances which may have been beyond their control at the time and do not accurately portray that person’s current financial situation. These include medical bills, divorces, and student loans. One thing to watch out for while reading the score is a bankruptcy. If one is found it is imperative that it has been discharged. If it has been discharged check to make sure the tenant is not repeating the same habits that got him into bankruptcy. Finally, when running a married couple’s credit score make sure to run both the husband and the wife’s score. The total household debt per month is the important figure.
The credit score must be thought of as the title to a novel. It gives you an idea of what is inside but you must read through it to form an accurate picture of the applicant. When used correctly the credit score can be an indispensable part of the tenant screening process and will help ensure a responsible tenant.
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