Credit scores are one of the main factors that landlords consider when screening potential renters. The reason is simple: a good credit score indicates the applicant has a solid track record of paying their debts on time. That means they’re likely to keep with their rent, which is the most crucial quality for a tenant.
But what’s considered a “good” credit score, anyway? What number should you look for when screening potential tenants to minimize the risk of non-payment of rent? In this article, we’ll discuss the factors determining a person’s credit score, how credit score ranges work, and what scores are considered acceptable.
What is a credit score?
A credit score is a three-digit number that measures an individual’s creditworthiness. In other words, it indicates how likely they are to repay borrowed money or pay their bills on time. The higher the credit score, the more financially stable and reliable the individual.
A high credit score suggests the applicant has a history of paying bills on time and managing their debt responsibly. On the other hand, a low credit score suggests problems with money management, which may include a history of late payments or defaults.
Timely rent payments are the lifeblood of your rental business, so you want to pay attention to a potential tenant’s credit score during the screening process. It can help you assess their ability to pay rent on time. The last thing you want is to give the keys to a tenant who is at risk of falling behind on payments. You could find yourself frantically chasing them for past-due rent and, in the worst-case scenario, go through a grueling and costly eviction.
Understanding credit score ranges
The higher a tenant’s credit score, the more likely they are to pay their bills on time, including rent. That’s the general rule you need to know when assessing credit scores. But how do you draw the line between a good score and a bad one? The answer is you must understand credit score ranges and what they mean.
Credit scores typically range from 300 to 900, depending on the scoring model used. Within that range, there are various categories of scores, which can help you quickly determine a person’s overall credit health. Generally, these categories are the following: poor, fair, good, very good, and excellent.
Credit bureaus, such as Equifax and TransUnion, use various models to calculate individual credit scores, which means the definition of acceptable credit score will vary. As a result, there is no universal standard for a “good” credit score, a “bad” credit score, etc. However, a score between 640 and 699 is considered good under most scoring models. You can use this range as a benchmark when reviewing potential tenants.
Of course, be sure to make strategic adjustments as needed based on your risk tolerance and external factors like the state of the economy. For example, in a recession, tenants often experience more financial challenges, so the optimal range for a good credit score will drop. In this case, it makes sense to lower your expectations and accept applicants with lower scores.
To help you become familiar with credit score ranges, we’ve provided an overview of three common credit scoring systems below.
Equifax Risk Score (ERS) 2.0
The Equifax Risk Score (ERS) 2.0 is a credit scoring system developed by Equifax Canada. It predicts the risk of a customer or borrower falling 90 days or more behind their payment deadline.
The credit score range for this model is between 300 and 900. Here’s how each score is classified:
- Excellent: 741-900
- Very good: 713-740
- Good: 660-712
- Fair: 575-659
- Poor: 300-574
FICO Score 8
The Fair Isaac Corporation created FICO scores, a series of credit scoring models used by over 90% of the top lenders. A FICO score is calculated using information compiled by Equifax, TransUnion, and Experian, North America’s three major credit bureaus.
The credit score range for FICO Score 8 (the most widely used version) runs from 300 to 850. Here’s a breakdown of each range and what it means for individuals’ credit standing:
- Exceptional: 800-850
- Very good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: 300-580
TransUnion VantageScore 3.0
TransUnion relies primarily on VantageScore models to assess an individual’s creditworthiness. Several versions exist, one of which is the 3.0 model, developed by VantageScore Solutions in 2013.
Under the VantageScore 3.0 model, credit scores range from 300 and 850. Here’s what each score means based on the category it falls into:
- Excellent: 781-850
- Good: 661-780
- Fair: 601-660
- Poor: 300-600
How is a credit score calculated?
Credit bureaus like Equifax and TransUnion create credit scores by collecting financial information provided by lenders and creditors. In turn, they feed that data into a scoring model, such as FICO Score 8, to produce a credit score. Below are the five primary factors that influence a person’s credit score.
Payment history. Payment history has the most significant impact on an individual’s credit score, usually accounting for 35% to 40% of the overall score. This factor assesses how well they meet their payment deadlines, considering on-time payments, late payments, and accounts written off or sent to collections.
Credit utilization. This factor measures the amount of available credit an individual uses on their credit cards and lines of credit. Next to payment history, credit utilization has the most significant impact on a credit score, accounting for 20% to 30% of the overall score. The lower the credit utilization rate, the better, as it indicates a lower reliance on debt. Equifax and TransUnion recommend keeping credit usage under 30% to maintain a healthy credit score.
Length of credit history. Credit history length measures how long an individual has maintained credit accounts, including credit cards, mortgages, and student loans. This factor considers the youngest, oldest, and average age of debt, and accounts for 15% to 20% of an individual’s credit score. Credit history matters because experience generally makes one better at managing debt, especially when it comes to making on-time payments.
Credit mix. Credit mix examines the different types of debt an individual has been responsible for paying. Most scoring systems assign a higher value to individuals who have experience managing a diverse range of debts, including mortgages, car loans, credit cards, and lines of credit. Credit mix accounts for approximately 10% of an individual’s credit score.
New Credit. Most credit scoring models place some emphasis on recent credit accounts opened, which trigger hard inquiries from lenders. A hard inquiry occurs when a lender pulls an individual’s credit report to determine whether to approve them for a loan. According to Experian, each credit inquiry decreases a credit score by approximately five points for a brief period. Too many hard checks over a short period may signal desperation for money or a lack of financing options, which isn’t a good sign. New credit makes up about 10% of an applicant’s credit score.
Our final thoughts
Credit scores are valuable tools for assessing a tenant’s risk of defaulting on rent payments. The higher the score, the more likely they are to make timely payments, which is the most important characteristic you want in a tenant. Generally, a good credit score ranges from 640 to 699 on most credit scoring models. You can use this range as your guideline when evaluating applicants. Make adjustments as needed based on your risk tolerance, market conditions, and other relevant factors.
While a credit score can tell you much about a tenant’s ability to manage rent payments, it doesn’t tell the whole story about their financial health. Sometimes, a renter with a poor credit score may still be a viable candidate or vice versa. When screening a potential tenant, ensure you review their credit report—don’t rely solely on their credit score. Check out our guide on interpreting a credit report to learn more.
