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, seeking to remedy unfair housing discrimination against individuals with criminal records. We’ve written about the new law requirements, 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, respect the property, and 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, makes 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 relatively young renters may not have enough financial history to establish a strong credit score. Landlords should consider these circumstances when they evaluate an applicant’s credit score.
Credit Score Ranges & What the Numbers Mean for Landlords
Landlords may wonder, "What are the acceptable ranges for a tenant's credit score?" The answer will likely vary slightly from each landlord to the next. First, it might be helpful to provide some context on credit scores. Did you know that generic credit scoring models have been around for over 35 years? Various factors influence an individual's credit score, such as payment history and number of credit accounts. But how do landlords and property managers know what to make of an individual renter's credit score? This is where the credit scoring industry's accepted scoring model could be useful and could come into play.
There are three major players in the national credit reporting company (CRC) sphere for the United States: Equifax, Experian, and TransUnion. Landlords may maintain substantial confidence in tenant screening credit reports generated by one of these CRCs as they've been around the longest. But that is an individual decision. Currently, there are two commonly used credit scoring models, FICO and VantageScore. The scoring ranges vary slightly between these two models, but both FICO and VantageScore break down an individual’s creditworthiness into five credit score ranges:
Credit Score of 300- 579
This is regarded as the lowest end of the spectrum and maybe dubbed by some as a "very poor" credit score.
Credit Score of 580 - 669
The two common credit scoring models differ slightly in this range, where scores below 600 may be interpreted as “poor,” but anything in the 601 – 660 range is considered a "fair" credit score according to VantageScore; in the FICO model, the 580 – 669 range is regarded as a “fair” score.
Credit Score of 670 - 739
A credit score in this range might be considered a "good" score according to both common credit scoring models.
Credit Score of 740 - 799
According to both credit scoring models, a score in this range may be considered "very good" according to both credit scoring models, " but VantageScore interprets anything above 781 as an “excellent” credit score.
Credit Score of 800+
According to the FICO scoring model, scores above 800 are deemed “exceptional.”
Of course, credit scores and ratings by third parties are just some of the data and information landlords may collect and evaluate when evaluating tenant applications. Domu's goal is to provide background for these important decisions.
Warning Signs for Landlords in Renter's 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.
Reminder to Cook County landlords to select a credit report that does not incorporate information about an applicant’s criminal history. Another warning sign is a credit report supplied directly by the renter. These reports should be obtained via trusted third-party services. Nationwide credit reporting services make the process quick and simple for landlords and can be done entirely online. 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 predict the answer accurately. 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. Combined with a credit score, these factors should paint a reasonably accurate picture of a potential renter’s ability to pay the apartment rent.
Disclaimer: The general information that Domu provides about Chicago landlord-tenant law is not intended as legal advice. Domu endeavors to provide accurate information, but the law is subject to change, and Domu is not a law firm or provider of legal services and makes no warranty regarding this information’s accuracy, completeness, reliability or usefulness. This information is for informational purposes only. Questions about your particular leasing situation should be directed to a lawyer.