Property Management Blog

Analyzing the reason behind the credit score

Ironclad Property Management - Tuesday, August 11, 2020

Did you know that not all credit scores are created equal? 

I like to tell the story of my all-time favorite tenant.  My favorite tenant had a credit score when I put him into a house I own of less than 600.  While frequently anything below 650 is a definite no for most landlords renting houses, I like to analyze the reason behind the credit score.  In this case, he was relatively young, did not have many credit cards (if any) and had one unpaid medical bill of $25.  He had zero other negative dings on his credit, just was young and did not really have any credit and was probably unaware of the outstanding medical bill. 

I tried him out and he was fantastic.  Even now he just sent me photos that he pressure washed the outside of the property without me having to pay anything.  If we, as a company, just set minimum thresholds for everything, we would have missed out on this and other great tenants.

You may be asking if it is discriminatory to reject someone with a higher credit score but accept someone with a lower score.  Here at Ironclad Property Management, we like to analyze the reason behind the credit score and not the actual score itself.

If he had a number of collections to his name, especially bills that include late car payments, outstanding utility bills, or unpaid collections, to other property management companies, we would have immediately told him no. 

We’ve seen a 600+ credit score applicant that we would not put into my property because the tenant told me (and we could see it in the credit report) that she contested every single outstanding item on the credit report as fraudulent.  When this occurs the party who put the financial liability on the tenant’s credit report is responsible to look into it and confirm the outstanding balance.  If the bill is $25, do you think the medical company is really going to take the time to go in and explain that the bill is not actually fraudulent?

We as a company are looking for things that would indicate that they could be unfit tenants.  We consider five main categories:

  1. Evictions – if a tenant is evicted once, they are more likely to go through an eviction again. 
  2. Unpaid Debts to an owner – there are only two reasons for unpaid debts to an owner; unpaid rent or wrecking a property.  We will never put someone into a property with an unpaid debt for a property they rented.  You will for sure lose money when the tenant leaves the property.
  3. Car Repossessions – if a tenant is about to lose their car, how are they supposed to drive to work?
  4. Utilities – if a tenant has a gas or electric balance, how are they supposed to keep the heat and electricity on in the winter time?
  5. Obvious signs of credit manipulation – If a tenant has every item being contested on their credit report, this is a sign they are doing credit manipulation.  Another sign is when you see a tenant take out a credit card, pay on it for a couple years and then take out another credit card and stop paying on the previous one.

We as a company are willing to accept tenants that have major life events that they are not as able to control including:

  1. Divorce – You can clearly see this one as great credit and then everything fell off a cliff. 
  2. Health Issues – Medical debts can have a significant impact on your credit.
  3. Student Loans – The student debt crisis is widespread but this does not mean that these tenants are not going to pay their rent because they are unable to pay for their student loans.
  4. Other Utilities – Plenty of tenants do not pay their cell phone bill or cable tv bill but these same tenants will pay their rent.

If you look for the obvious signs of a tenant who has debts that affect their ability to work (outstanding car loans), the tenant shows a knowledge of how to make their credit look better than reality (credit manipulation), or the tenant shows a history of not paying or fulfilling financial obligations specific to a property (evictions, outstanding balances to property management companies and/or utilities), you will have better luck using the credit report to make good leasing decisions.