How to Run a Tenant Credit Check and Why You Need To

By: , Contributor

Published on: Jan 03, 2020

Here's what you need to know before you start screening prospective tenants.

It can be a great idea to screen prospective tenants using their credit history. We’ll get into specifics later, but the general idea is that past financial behavior is a pretty reliable indicator of future financial behavior. If a tenant has a history of paying all bills on time and managing debts responsibly, there’s a high probability he or she will pay rent to you on time as well.

However, if you’re a new rental property owner, or if you’ve never run credit checks on prospective renters before, you might not know where to start. With that in mind, here’s a guide to how you can run credit checks on prospective tenants, what you should look for, and why it’s important to check the credit history of each and every prospective tenant who applies.

How to run a credit check on a prospective tenant

In general, here are the steps you’ll need to take to check a tenant’s creditworthiness:

  • Collect the necessary information
  • Show the credit bureaus that you’re really a landlord
  • Run a credit check with one or more of the major credit bureaus
  • Check employment and rental history
  • Make your decision

1. Collect the necessary information

Before you can conduct a credit check, you’ll need to gather certain information from your tenant. This includes their full legal name, any previous addresses for the past two years, their Social Security number, date of birth, current employer (including their supervisor’s name and contact number), and information about their current landlord. You should have prospective tenants fill out a rental application form that includes this information and be sure to check their driver’s license or other ID to make sure they are the same person they’re claiming to be on the application.

You’ll also need the tenant’s permission before running a credit check on them. You can either add a clause to the application form itself that grants you permission, or you could have them sign a separate credit check authorization form.

Some landlords charge a fee to cover the cost of running a credit check. This is a fairly common practice, but certainly isn’t something you need to do. On one hand, the presence of a fee will typically discourage unqualified or uninterested applicants from applying, but if the fee is too high, it could turn off serious renters as well.

(Note: If you hire a property manager, they’ll almost certainly conduct credit checks on prospective tenants on your behalf, but it’s still helpful to know how the process works.)

2. Show the credit bureaus that you’re really a landlord

Any individual can’t simply decide to run a credit check on someone else -- there needs to be a legitimate reason to do so. Whichever agency or bureau (more on that in the next section) you choose to run your credit checks through, you’ll need to show it that you’re actually a rental property owner.

You’ll typically need to send some type of proof that you own the rental property in question, such as a deed or mortgage statement, as well as verification of who you are (like an ID) and where you live.

3. Run a credit check with one or more of the major credit bureaus

There are three major credit bureaus that maintain files on U.S. consumers -- Experian, Equifax, and Transunion.

I suggest using Experian, since you don’t have to pay for the credit check and then charge tenants. Experian charges landlords no fee whatsoever to run a tenant’s credit report, but the tenant pays $14.95 for the service directly to Experian. Equifax costs $15.95 for a landlord credit check, while TransUnion sells a package of a credit report, recommendation, and a criminal background check for $29.95.

There are also several third-party services that specialize in conducting credit checks for landlords (you may hear these referred to as tenant screening services), although I’d advise that you request yours directly through one of the credit bureaus. All three have very user-friendly platforms to request a credit report on a prospective tenant.

4. Check employment and rental history

A thorough check of the creditworthiness of a prospective tenant goes beyond just whether they’ve been evicted and have paid all their bills on time. It’s also a good idea to take the time to verify their employment and rental situation.

On the employment front, you should call their current employer to verify that they actually work there. You should also ask to see W-2s, 1099s, or other relevant income documentation to back up their claimed income to make sure they can afford the rent.

It’s also a smart idea to call their current or previous landlord (if applicable) to get a better sense of what kind of tenant they are. Who would know better than someone who has been in the same position you’d be in?

5. Make your decision

In a perfect world, every credit decision would be clear-cut. You’d only get applicants who either had top-notch credit or who were obviously unqualified.

Unfortunately, this isn’t a perfect world. Most of your applicants will likely be clearly qualified or not, but there will be borderline cases as well. We’ll get into what you should look for in the next section, but the bottom line is that it isn’t always an easy decision. For example, maybe an applicant’s credit report is spotless except for a couple of late credit card payments a year ago. In cases like these, it’s a good idea to talk with the applicant to find out the story behind it.

You’ll ultimately have to decide how much risk you’re comfortable with. But know that if you reject a tenant’s application because of information you found in their credit report, you need to mail them an Adverse Action letter in order to comply with the Fair Credit Reporting Act. This is a letter telling them that they have been declined, and why. You also need to write this letter if you approve a tenant but require an increased security deposit or cosigner because of their credit information. On the letter, you must include:

  • The exact reasons for your rejection. In other words, "history of evictions from previous rentals," is better than "poor credit history."
  • The name, address, and phone number of whatever agency you used to conduct the credit check.
  • A statement informing them of their right to request a free copy of their credit report from the agency that provided the information within 60 days.

What should you look for in the credit check?

Credit checks can tell you quite a bit of information about a prospective tenant. Your credit check may include information such as:

  • The tenant’s name and date of birth
  • Known previous addresses
  • A list of credit and loan accounts, including a payment history for each and the monthly payment amount
  • Any bankruptcies from the past 10 years
  • Any tax liens or civil judgments against them
  • Any reported evictions
  • Other entities who have requested their credit report in the past year

Not all credit checks include a FICO score, but many do. And if you have the option to view it, the FICO score can be a good overall indicator of credit risk.

FICO credit scores range from a low of 300 to a high of 850. The average American has a FICO credit score of 700. Anything over a 650 or so is generally considered to be good credit, while a 720 or higher is typically regarded as great credit.

While it certainly can be easier to solely use the FICO score to approve or reject prospective tenants, it’s important to realize that the FICO score doesn’t paint a complete picture of a tenant’s qualifications. Specifically, in addition to the FICO score, it can be a good idea to consider some other factors that might not be fully reflected in the score.

  • Payment history -- The tenant’s history of payments is the single largest contributing factor to their FICO score. However, it’s worth mentioning that missed payments, collection accounts, and charge-offs can stay on a credit report for as long as seven years. The point is that if a tenant has a FICO score that’s a bit on the low side, it can be worth checking when their adverse credit behavior took place. If they have a bunch of recent missed payments, it can be a good indicator that they aren’t very financially responsible. On the other hand, if their score is weighed down by a bunch of late payments from several years ago, a good recent credit history can be a reason to overlook a low score.
  • Rental history -- Landlords can run credit checks that include information about their previous rental activity. If you find out that a tenant still owes money to a previous landlord or has a history of evictions, it can be a good idea to pass on them, regardless of their credit score.

Why running a credit check is so important

It’s worth mentioning that you can’t just pick and choose which applicants you want to run credit checks on. Either run credit checks in the same manner on all applicants, or none at all. Doing credit checks on a case-by-case basis is an easy way to get accused of discrimination.

Having said that, I completely recommend the first option -- running credit checks on everyone. The small amount of time that it takes to run credit checks can save you the headaches and expenses that come from dealing with late rent payments, evictions, and other tenant drama.

Become A Mogul Today

Real estate is one of the most reliable and powerful ways to grow your wealth - but deciding where to start can be paralyzing.

That's why we launched Mogul, a breakthrough service designed to help you take advantage of this critical asset class. Mogul members receive investing alerts, tax optimization strategies, and access to exclusive events and webinars. Past alerts have included investments with projected IRRs (internal rates of return) of 16.1%, 19.4%, even 23.9%.

Join the waitlist for Mogul here and receive a complimentary 40-page guide on a NEW way to build wealth. Join waitlist now.

FREE - Guide To Real Estate Investing

The Motley Fool has a disclosure policy.