What Should Landlords Look for in A Tenant Credit Report?

Being a landlord in today’s rental market requires diligence and experience. To avoid leasing their units to risky tenants, most landlords rely on tenant credit checks — it’s a foundational part of the tenant screening process. While these checks are very insightful, even seasoned landlords can overlook important information.

SingleKey offers a great way for landlords to screen tenants via our Tenant Credit & Background Check. We have helped landlords across Canada screen and verify thousands of prospective tenants, providing them with insights to help them make renting risk-free and hassle-free. To help landlords learn how to read the SingleKey tenant screening report, we’ll review the top 5 tenant credit check metrics.

how to read a credit report for landlords

Don’t forget to check out our sample tenant credit check report. We’ll be using it as a reference throughout this article.

How to Read a Credit Report for Landlords: 5 Key Tips

  1. Learn the Difference Between Poor, Good, and Great Credit Scores

The first risk indicator landlords typically review is the credit score. SingleKey uses an Equifax ER 2.0 score to create an accurate picture of the tenant’s financial health. A credit score is a useful metric encompassing the entire spectrum of a prospective tenant’s financial standing, including: 

      • Payment Behavior
      • Debt 
      • Income
      • Outstanding Debt
      • Late Payments

The average Canadian has a credit score of 630. So tenants with a score ranging from 600 to 700 are considered to have an average score. When reviewing rental applicants with a score below 600, landlords may want to look more carefully. A credit score below 500 is likely due to poor payment behaviour or a recent bankruptcy, indicating the riskiest applicants. 

tenant credit report for landlords

While a low credit score doesn’t mean that a tenant will be delinquent on rent, we can safely make the assumption that a tenant who doesn’t pay their bills on time is more likely to not pay their rent on time.

  1. Identify the Types of Debt the Tenant Owes

Another key piece of information on our tenant credit reports is debt. While large amounts of any debt aren’t a great sign, it’s important to understand that not all debt is created equally.

High-Interest Debt

landlord-tenant-credit-checks

Credit cards and risky loan options, such as payday loans, are high-risk debt because of their higher interest rates. Also, payday loans are often the last resort for borrowers and can indicate the tenant may be going through financial hardship.

Low-Interest Debt

On the other hand, debt categories like mortgages and HELOCs (Home Equity Lines of Credit) are significantly less risky because of the lower interest rates and the asset securing the loan. Also, individuals can rent out their property to cover the mortgage payment. 

Student debt and car payments are forms of debt that aren’t as risky as credit cards or payday loan debt. What is important here is whether the applicant has been able to make regular payments.

  1. Tally Up the Total Monthly Debt Payments

Credit reports outline the number of regular payments that a person has to pay towards items such as an auto loan, credit card, or cell phone. It is important to review these monthly payments because they show the portion of the applicant’s income going towards recurring expenses and bills.

For example, in SingleKey’s sample credit report, the “Payment Term Amount” shows how much money is to be paid, while the “Narrative” explains the frequency of payments.

tenant monthly debt payments

To give you a real-world example, if the applicant’s pre-tax income is $3000 per month but they have to pay $1000 towards their credit card and car loan payments every month, this doesn’t leave much behind to cover rent and living expenses.

  1. Calculate the Rent-to-Income Ratio

It’s important to know if the tenant can actually afford the expense of renting a unit. A landlord should consider how the tenant’s monthly income compares to how much they will have to pay for monthly rent. To simplify the process, SingleKey’s tenant credit report calculates the rent-to-income ratio so you won’t have to worry about it.

Looking at the tenant’s rent-to-income ratio gives you a good sense of affordability. If they make $3000 per month, but are applying for a unit where the rent is $2000 per month — that’s a red flag.  

We also suggest going one step further and using the (rent + debt payments) to income ratio. With this formula, both their monthly debt payments and their rent are used to get a better grasp on how much they can really afford. 

Our data shows affordability is one of the top predictors of tenant rent default. If a tenant is spending more than 50% of their income on rent, there won’t be much left to save for a rainy day. In this scenario,unexpected expenses or job loss would cause the tenant to stop paying rent.

  1. Focus on Collections and Bankruptcies

Collection items and bankruptcy demonstrate financial responsibility, and remain on a credit report for 6 years and have a significant impact on credit scores. Collections and bankruptcy can happen, but it’s important to ask the right questions when you see them on a tenant’s credit report.

1. What was the amount owing?

The amount owing is an important factor in determining how detrimental the outstanding payment is to the applicant.

2. How old is the default?

In cases where a bankruptcy occurred 5 years ago, that is not nearly as important as when the bankruptcy is fresh. The older the bankruptcy, the less financial strain the applicant is under. 

3. What type of debt was it?

If a collections item is for a payday loan, that is much more worrisome than if it was an outstanding phone bill.

Collection items and bankruptcy demonstrate financial responsibility, and remain on a credit report for 6 years and have a significant impact on credit scores. Collections and bankruptcy can happen, but it’s important to ask the right questions when you see them on a tenant’s credit report.

KEY TAKEAWAYS

The 5 Things Landlords Should Look Out for on a Tenant Credit Check

  1. Credit Score
  2. Amount of Debt and Type of Debt
  3. Monthly Debt Payments
  4. Rent-to-Income Ratio
  5. Collections and Bankruptcy

Find the Right Applicant with Single Key’s Tenant Credit Report

Being smart with your tenant screening process keeps your renting risk-free. A good tenant will not only have a stable income, but they’ll have a reassuring financial history. Keeping in mind the 5 key risk indicators in this guide will help you get the most out of your tenant credit report and raise any red flags that you should be aware of. 

If you are looking for the best tool to screen your tenants, consider the SingleKey Tenant Credit and Background Check report. The five metrics we just reviewed are at the top of every report. 

Don’t forget that we also offer a free tenant review call to help walk you through the tenant report results, so book a call with us any time.