February 12, 2020 Landlord Advice

How Landlords Should Use Credit Scores

All Cook County landlords should be aware of the Just Housing Amendment to the Human Rights Ordinance, which went into effect on January 1, 2020 and which seeks to remedy unfair housing discrimination against individuals with criminal records. We’ve written about the requirements of the new law and while researching the issue, we started thinking more holistically about the purposes and efficacy of tenant screening methods. Generally, landlords screen tenant applicants to determine whether they have the resources to pay the rent, whether they will respect the property, and whether they will cause trouble with neighbors or otherwise detract from the landlord’s goals of maximizing rental income and minimizing hassles. What are the most reliable sources of information available to landlords to assess these qualities? Generally, credit checks, employment records, and references from prior landlords.

First Steps in the Renter Pre-Qualification Process

Start by looking at credit scores. What exactly makes up a person’s credit score? Many people liken credit scores to an adult version of the “permanent record” that followed students throughout their careers in school. It’s a bit more complex in reality. Financial history such as outstanding debt and current account balances make up a good portion of a person’s credit score. The number also reflects a person’s timeliness in paying back creditors; a few delinquent payments or an abundance of credit cards in a person’s name can hurt a credit score.

But a credit score isn’t always the most accurate means to judge a potential renter’s financial solvency. Events such as divorce and identity theft may negatively skew a person’s credit score. And renters who are relatively young may not have enough financial history to establish a strong credit score. Landlords should take these circumstances into account when they evaluate an applicant’s credit score.

Warning Signs for Landlords in Renters Credit History

Late payment is an obvious red flag for landlords to spot in a potential renter’s credit history. The success of a landlord’s apartment operation hinges on timely payment. If a renter’s credit report shows a demonstrable trend of late payments, this is a pretty serious warning sign to landlords.

Another warning sign is a credit report that’s supplied directly by the renter. These reports should be obtained via trusted third-party services. There are nationwide credit reporting services that make the process quick and simple for landlords and can be done entirely online. Reminder to Cook County landlords to select a credit report that does not incorporate information about an applicant’s criminal history. You can review some of the recommended services here.

Read more about the two-step tenant application process required by the Just Housing Amendment

Can Landlords Rely on Credit Scores in the Apartment Application Process?

Landlords take on a calculated risk by renting their home or apartment to a stranger. And the credit score may act as a barometer for the risk level of a potential renter. Just because an applicant has a low credit score, are they less likely to pay the rent on time and in full each month? A landlord would need fortune-telling skills to accurately predict the answer. And because there are very few clairvoyants in the apartment business these days, landlords will inevitably lean on the objective credit score as a risk assessment tool.

Credit scores aren’t the only selection criteria at a landlord’s disposal. Collecting rental history and references from previous landlords is another advisable step in the pre-qualification process. Landlords should thoroughly check those references and verify that a renter’s employment info checks out. These factors, combined with a credit score, should paint a fairly accurate picture of a potential renter’s ability to pay the apartment rent.