How To Properly Run a Credit Check as a Landlord

Hands of estate agent giving keys to renting couple
•••

dragana991 / Getty Images

All landlords want good tenants who will pay their rent on time. When reviewing potential renters, many landlords use credit checks to assess applicants’ rent-paying abilities. Credit reports provide important information about applicants’ financial situations. They can help landlords choose high-quality tenants from the start. Selecting the right tenants is essential because bad decisions can lead to evictions, which are disruptive, time-consuming, and expensive.

All landlords should know the basics of credit checks: where to get them, how to order them, and what the reports provide. Landlords also must comply with federal and state laws that govern how tenants’ credit information can be used.

Key Takeaways

  • Credit reports can help landlords choose tenants who are likely to pay rent on time.
  • Credit reports can be purchased alone or in conjunction with other products from the three credit reporting agencies or screening companies.
  • Landlords who use credit reports to make rental decisions must comply with federal and state housing and consumer credit laws. 

Why Is a Credit Check Important for Landlords?

A credit check is an essential part of the tenant review process. It provides an overview of an individual’s financial status, including the amount of debt they’re carrying and their bill-paying history. A credit report is based on the assumption that people who’ve met their financial obligations in the past will do so in the future.

When landlords use credit information to make rental decisions, they must comply with the Fair Housing Act, a federal law that prohibits discrimination in the sale or rental of housing. Landlords must treat all tenants fairly and can’t discriminate based on race, sex, religion, or other factors specified in the law.

While credit checks are useful for assessing applicants’ rent-paying ability, they’re just one part of the screening process. Landlords should consider using additional screening tools, like background checks and criminal histories.

What Do Landlords Need From Tenants?

You can facilitate the credit-checking process by gathering all the information you need from prospective tenants when they apply for a rental.

Rental Application

The primary tool for collecting information about prospective renters is the rental application. A good application will help you weed out unqualified applicants, so you can zero in on the best prospects. It will also include all the data you need to run a credit check. Here’s a partial list of the information an application should include:

  • Personal information, including full name, current address, Social Security number, date of birth, and driver’s license number
  • Employment and income information
  • Names of co-habitants (e.g., family members or roommates)
  • Residence history, including any previous evictions
  • Relevant criminal convictions
  • Pets, vehicles, and smoking status

Tenant’s Permission

The Fair Credit Reporting Act law allows landlords to obtain consumer reports like credit and background checks as long as they have a permissible purpose. The law doesn’t require landlords to obtain tenants’ permission before ordering the reports. Nevertheless, landlords can demonstrate they have a permissible purpose by requesting consent in the application. When ordering reports, landlords must certify to the report provider that they’ll use the report for housing purposes only.

Some states may have laws regarding the use of consumer reports that are stricter than federal laws. Landlords should understand how the laws apply in their state.

How Much Does a Credit Check Cost?

The cost of a credit check varies depending on the provider and the scope of the report. For instance, Experian offers a basic credit check and credit score for $14.95. Transunion charges $25 for its SmartCheck Basic, which includes a criminal background check and a Credit-Based ResidentScore (Transunion’s proprietary score). RentPrep offers a full credit report, background check, and the company’s proprietary ResidentScore for $38.

Landlords can charge applicants for the cost of credit checks and other screening reports, but the amount may be limited by state law. For instance, California law in 2021 prohibits landlords from charging more than $53.33 for a screening fee.

Credit Check Services

Many landlords purchase credit checks as part of a tenant screening service. Screening services are available from companies like CoreLogic, RentSpree, and RentPrep as well as the three major credit bureaus, Experian, Transunion, and Equifax.

Screening services are typically sold as package deals that include credit reports, credit scores, and other reports, like background checks and eviction histories. These services can be cost-effective if you want several types of reports for each applicant. Before signing on with a screening service, however, be sure you understand what you’ll get. For instance, if you want full credit reports, be sure they’re included in the price.

What To Look for in a Credit Report

Here are some key things to look for when evaluating a credit report:

  • Credit Score: Both FICO and Vantage scores range from 300 to 850. A credit score is an indication of an applicant’s financial health, but it’s not the whole story. If an applicant has a low score, you’ll need to read the whole report to understand the reasons behind it.
  • Debt Load: A tenant who’s burdened with large debts may be unable to keep up with rental payments. Consider the applicant’s rent-to-income ratio (RTI), calculated by dividing monthly rent by monthly gross income. Many landlords follow the so-called 30% rule, whereby a tenant’s rent should not exceed 30% of their gross income. For example, if a tenant’s monthly gross income is $6,000, they can’t afford more than $1,800 per month in rent.
  • Late Payments: If a tenant hasn’t paid credit card and other bills on time, there’s a good chance they won’t pay their rent on time either.
  • Credit Inquiries: A credit report lists “hard” inquiries by lenders, which indicate the tenant has applied for a loan or credit card. New accounts could add to their debt load.
  • Delinquent Rental Payments: An applicant is unlikely to pay rent on time if they failed to pay rent they owed to previous landlords on time.
  • Negative Information: Evidence of previous bankruptcies, liens, garnishments, car repossessions, accounts in collection, and similar issues are red flags that indicate the applicant has financial problems.

What To Do if an Applicant Has Bad Credit

Suppose you’ve reviewed the applicant’s credit report and decided to reject them. You’re required by federal law to inform them of the reason for the rejection. 

If an applicant has a poor credit score, you shouldn’t reject that person out of hand. Instead, look for the reasons for the poor score, such as a large medical bill or expenses resulting from an accident. A positive rental history and a solid income may outweigh a bad credit score.

You must provide applicants with the contact information as to the reporting company you used and inform them that they have the right to dispute the information in the report. You must also tell the applicant that you (not the reporting company) made the decision to reject them.

Frequently Asked Questions (FAQs)

How long does it take to run a tenant credit check? 

The results may be available within a few minutes or several days, depending on the type of report requested.

How do you turn down a tenant with bad credit?

Explain the reasons for the rejection. Be sure your explanation complies with the Fair Credit Reporting Act.