Credit Reports: Why They Don't Work

5 Reasons Credit Reports Don't Work

What??? Credit reports don't work? This must be a joke, right? Tenant credit reports are one of the most important screening tools in the rental housing industry.

In order to secure a good tenant for your rental, it is critical that we practice proper tenant screening. This includes verification of all the reference information on a detailed tenant rental application. A credit report is an important final step of verifying the tenant's financial history, or track record.

Credit reports contain important factors in evaluating a person's creditworthiness. Creditworthiness, of course, is what you are looking for if you plan to hand over your rental property to someone.

So What Are "5 Reasons Credit Reports Don't Work?"

1. Making your decision based on how you feel about the prospect

   It happens every day. You show your rental property to someone you really like. They seem so nice and you leave the appointment feeling like you've got this deal in the bag. It could be a nice friendly couple you seem to have hit it off with, or a friendly guy who seems too good to be true. They may ask questions like, "Is it OK if I plant a few flowers in the garden?", or "Do you mind if I fix small things that need fixing?"
   Although it's great to find a tenant you like, that is only one factor. You still will need a good understanding of his or her credit history.

2. Relying soley on the credit score

   

   • very little credit history? Believe it or not, some people have a great credit score with only one active account on their report. A single store credit card account, such as Macy's can give you a great credit score, but that is just not enough information to evaluate a tenant.
   • closed negative accounts? It is not uncommon to see a good score along with closed accounts, even some old negative ones on a credit report.
   • charged off accounts? It is possible to see a good score along with charged off accounts.
   • crazy address history? A new address every 6 months for the last 5 years is a sign that this person can not stay put in one place very long. It could have to do with going from job to job, or possibly not getting along with his landlords.

3. Forgetting that a credit report is only one of the deciding factors.

   If you feel the person is untrustworthy, irresponsible or just a plain jerk, that is a major factor for you to consider, even if the credit report is good.
   

   

4. Not verifying the identity of the applicant

   You MUST MUST MUST verify the prospect's identity! Ask to see a driver's license and also get or make a copy of it. Always make sure the person you are screening is the same person on the credit report.
   
   

5. Not understanding how to read a credit report

   If you don't understand the jargon and codes in an average credit report, don't feel bad. It's easy and the following link will help you understand and be able to analyze credit reports and make good screening decisions.
   How to Read and Understand a Credit Report Step by Step
   
   

Conclusion:
Credit reports do work and are one of the most effective financial screening tools in the real estate industry, but as with any other tool, such as a hammer, it must be understood and used properly to be most effective in tenant screening.

About the author:
As a Real Estate broker / investor in New York, John Nuzzolese has been involved with rentals and investment property since 1979. Besides owning and operating two real estate businesses, he is president and founder of The Landlord Protection Agency, Inc. , an organization specializing in helping landlords and property managers avoid the hurdles and pitfalls and expensive blunders common when dealing with tenants.

More information on The Landlord Protection Agency is available at www.theLPA.com

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