Tenant Advice

How To Interpret Credit Reports

tenant screening

Realtor.com recently published an article outlining a number of missteps that people often take that causes their credit reports to be negatively impacted.  Although the article itself was aimed at potential homeowners, the same lessons apply to potential renters as well as landlords/property who need to properly understand credit reports if they are to have any chance of knowing what to look for in a qualified tenant.

creditscore

When evaluating a potential tenant’s credit report, a landlord or property manager needs to know what can be the causes of a lower-than-expected credit score.  Not all low credit scores mean necessarily mean that the holder has a terrible credit history.  In fact, the low score could be the result of fairly simple mistakes that can be addressed.  When ordering a tenant screening report, it is critical to fully understand all the ways that an applicant’s credit report could be impacted.

Mistake 1: Closing old credit card accounts

There is a general tendency to believe that closing out credit card accounts is a surefire way to improve your credit.  Unfortunately, it’s not always that simple.  While your applicant’s intentions may be well intentioned and actually aimed at improving their tenant score, closing old credit card accounts can hurt the applicant’s debt-to-credit utilization ratio—a fancy term for how much debt you’ve accumulated on your credit card accounts, divided by the credit limit on the sum of your accounts. 

Mistake 2: Opening a new credit card

On the flip side, people often mistakingly believe that opening a new credit card will help them quickly establish credit history and improve their credit score.  Just like it can be a negative to close out an old credit card account, a credit score can also be negatively affected by opening a new credit card.

Actually, applying for a new credit card can ding your score by up to 5 points, says Beverly Harzog, a consumer credit expert and author of “The Debt Escape Plan,” because it results in a “hard inquiry” on your credit report.

Mistake 3: Not using your credit cards

Just having credit cards is not in itself enough to improve your credit score.  In fact, by not using your credit cards, your score is going to be negatively impacted because there will be less credit history for the score to be based upon.  Additionally,

if you don’t use your credit card for an extended period of time—typically six months—your card issuer might decide to close the account (given you’re not generating revenue for the company). And as you might have guessed by now, this would lower the average length of your credit history, thus damaging your credit score.

“If you’re not an active credit card shopper, you still need to dust off your card from time to time,” says Harzog. To keep your credit cards active, Harzog recommends charging a purchase at least once every four months—and, of course, paying it off in full.

Mistake 4: Failing to pay your medical bills

Ok, now finally moving away from credit cards, your applicant may have a lower than expected credit score for an entirely different, but still not nefarious, reason: they suffered a medical situation and have not yet been able to pay off their medical bills.  Medicine is expensive, particularly in the United States, and those bills alone can have huge impacts on an applicant’s credit score.

hen you default on medical debt, your doctor’s office or hospital will likely outsource it to a debt collection agency. The debt collector may then decide to notify the credit bureaus that you’re overdue on your medical payments—placing a deep black mark on your credit report.

Your best move? Be proactive. If you know that you’re going to miss a payment, notify your medical provider ahead of time.

Mistake 5: Co-signing a loan

Being on the hook for someone else’s loan is always dangerous.  Your applicant again may have had the best intentions, but being a co-signer on a loan is substantial liability.  Co-signing for a loan is essentially no different than you applying for the loan yourself, in the sense that your credit score is at risk. 

Mistake 6: Missing payments on a business credit card

Now this may finally be the most surprising negative credit action.  If your applicant owns a business and runs up debt on his/her business credit card, that debt can have very severe negative effects on the applicant’s personal credit score.  As the business owner, the applicant is personally liable for the business’ credit card debt.  If the applicant then default on the card, the creditor can report it to the credit bureaus, which can hurt your applicant’s credit score.

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