A credit score is a financial metric that measures an individual’s creditworthiness or the risk of lending money to them. The higher a person’s score, the more favourable it is to extend credit to them.

Banks and lending institutions frequently analyze this three-digit indicator when evaluating loan applications. But landlords also use it to gauge tenants’ ability to pay rent on time.

Let’s say you spot a low credit score on a tenant’s credit report. Does that mean they’re a terrible tenant who’ll routinely miss their rent payments and cause you grief?

The answer is “no.” A poor credit score doesn’t necessarily imply a low-quality tenant. While it does serve as a way to identify potentially high-risk applicants, it doesn’t tell the whole story. Other aspects of their application could more than redeem them for this one blemish.

As a result, it’s crucial to dig into the details regarding a tenant’s finances and explore options that can reduce your risk of renting to them.

Here are five things to consider when evaluating a tenant with a bad credit score.

1. Examine the rest of the credit report

It’s wise to evaluate a tenant’s entire credit report before deciding whether to grant them tenancy or not. Here are some essential items to assess.

Payment history

Naturally, this section is particularly relevant as it showcases the tenant’s ability to meet payment deadlines. Examine how many accounts they currently have open and use actively. Do they have a history of late payments? If so, how many days on average do they pay late (30, 60, 90, etc.)?

Outstanding Debt

A tenant who carries a heavy debt load is more likely to experience financial difficulty than one who rarely relies on credit products to get by. Assess what size of debt their responsible for paying, their monthly payment, and the length of time they’ve been actively making payments.

Rent-to-income ratio

Calculating a tenant’s rent-to-income ratio can help you determine whether they can afford their rent based on their take-home pay. The higher the ratio, the more likely they will miss a payment and have less money available to cover other expenses.

Be wary of tenants whose monthly ratio exceeds 45%, as their risk of default is considerably high.

Bankruptcies and accounts in collections

An active account that creditors have sent to a collection agency is a major red flag in a credit report. It indicates the tenant struggles in keeping up with their debt or bill payments. 

Still, ensure you keep things in context. How long ago did the collection agency assume control of the account? Is the amount on the account significant? Has the tenant made a concerted effort to pay down the balance?

Bankruptcy is the most severe negative item you can find on a tenant’s credit report. Like an account sent to collections, it can cause a credit score to plummet. 

As with a past-due account sent to collections, it’s essential to understand the details. How long did the bankruptcy occur? Was the amount significant? And what type of debt was it? 

Negative records like bankruptcies and accounts in default can seriously impair a tenant’s credit score for a long time. For example, bankruptcy remains on a person’s credit for seven years or more.

However, the tenant may have since recovered from the ordeal and regained their financial footing. Sometimes, it can take a while for a person’s credit history to account for this improvement. Thus, their current credit score may not accurately reflect their present circumstances.

Closed accounts

Closing one or more credit accounts can negatively impact a person’s credit score for the short term. The reason is that a closed account reduces the average age of their total active accounts. The average age of credit products is one of the factors credit bureaus use to determine people’s credit scores. If the average age decreases, so can the credit score.

Hard inquiries

A hard inquiry can result in a temporary dip in a tenant’s credit score, especially if many occur during a short time.

Numerous hard inquiries on a credit report may or may not be a cause for concern. The tenant may have sent applications to multiple lenders to obtain the best deal for a personal loan, which is fine. Or they may have been frantically seeking new credit cards to pay their phone bill – not a good sign.

2. Speak with the tenant about their credit history

A great way to gain insight into a tenant’s credit history is to speak to them directly. If they’re willing to chat, they may provide you with valuable details about the reasons for their poor credit profile.

In some cases, you’ll discover that the tenant’s poor credit score is due to an unfortunate scenario that occurred years ago. Their predicament may have arisen suddenly from a major life event they had little or no control over.

Events that can have a severely negative impact on an individual’s credit are:

• Unexpected job loss
• Medical emergency
• Divorce
• Credit card fraud 

Just one such scenario can be enough to tarnish a tenant’s credit score, which may have taken them years to build up. 

Suppose considerable time has passed since a tenant’s credit deteriorated. In that case, they may have already resolved their past financial issues and are firmly on the road to recovery. However, their credit score can take a while to catch up with any progress they’ve made. So an incident that occurred many years ago may still affect their credit score today.

Look for evidence of responsible financial habits, such as on-time payments, before and after their setback(s). If their money management worsened while they were unemployed but subsequently improved when they secured a job, that’s a good sign.

3. Assess the tenant’s rental history

Another way to evaluate a tenant with a poor credit score is to obtain details about their rental history.

A great place to begin is by interviewing a tenant’s past landlord(s). By doing so, you can access helpful information about their payment habits, character, and how they treated the property during their stay.

Here are some questions you can ask them:

•         How consistent was the tenant with on-time payments?
•         If the tenant made late payments, did they work diligently to catch up, or did you have to remind them constantly?
•         Did the tenant maintain or neglect their cleaning duties?
•         Did the tenant notify you if the property needed repairs?
•         Did the tenant cause any severe damage to the property? If so, was it accidental or willful?
•         Was the tenant the recipient of complaints from neighbours?

Be sure also to ask the tenant to provide you with proof of past rent payments (bank statements, e-Transfers, etc.). You can ask for as many months as you feel necessary, but one year’s worth is usually enough. If they’ve been making rent payments without a hitch, that’s good news, despite their lacklustre credit score.

4. Confirm proof of income and employment

Ask the tenant to supply documents that verify their employment status, such as a pay stub.

Suppose they have a high-paying, stable job and earn a consistent income. In that case, you can reasonably assume they can manage rent payments for the foreseeable future. Remember that some jobs may be seasonal, so their income may fluctuate throughout the year.

But what if they’re unemployed or earn a meager income? In that case, you can request recent bank statements. Even if they’re not earning much income now, they may have substantial cash reserves. A tenant with a healthy savings account is well-equipped to continue making rent payments through a period of unemployment or low income.

5. Ask the tenant for a co-signor or guarantor

Let’s say you’ve done all the above steps to evaluate a prospective tenant, but they don’t quite tick all the boxes – and their poor credit score still concerns you. 

 A great way to offset your risk is to ask the tenant to have someone co-sign the lease agreement or act as a guarantor. In both cases, this second individual will assume legal responsibility for making rent payments should the tenant fail to do so.

 While both a co-signor and guarantor share joint responsibility for rent payments with the tenant, there’s a minor difference between the roles. A co-signor is responsible for rent payments alongside the tenant. Conversely, a guarantor only steps in to cover the rent if the tenant defaults.

 In most cases, the co-signor will be the tenant’s family member or a close friend.

Ensure the co-signor or guarantor chosen by the tenant has a stable income and solid credit history. After all, they’ll be acting as the backup for the lease, so you need assurances their financial house is in order.

Our Final Thoughts

A bad credit score shouldn’t cause you to disqualify a tenant automatically. Before skipping to the next applicant, you should assess other factors, such as their payment history, debt load, income, cash savings, past landlord references, etc. 

By evaluating a tenant solely through the lens of their credit score, you risk turning away a potentially great candidate for your rental. So always do sufficient research to build a holistic profile on them – never base your decision on one factor alone.

As mentioned previously, an excellent place to begin your quest to gather valuable details about a tenant is a credit report. But how do you go about acquiring one?

Singlekey Tenant Report offers a treasure trove of financial data (courtesy of Equifax) to help you rigorously screen a tenant. You can use the report to review a wide array of details, including: 

•  their Monthly debt payments
• their rent-to-income ratio:
• the types of credit products they use
• how often do they make late payments
• accounts sent to collections 

In addition, the Tenant Report also provides helpful background information on your applicant: it scans over 200,000 databases worldwide to gather details from past employers, court decisions, criminal records, negative press, public social media profiles, etc. 

 Interested in seeing what the Tenant Report looks like? Here’s a free sample report. 

If you want to learn more or purchase this user-friendly, comprehensive report to screen your next applicant, visit Singlekey’s Tenant Report page. If you already have your tenant’s basic details handy, you can have your report ready in as little as five minutes!