3 Reasons Why Landlords Need More Than A Credit Check
Your choice of tenants is easily the most critical decision you make as a landlord. Choosing the right tenants for your investment property will make your job easy. In contrast, the wrong occupants will consistently create problems that cause you stress and cost you thousands in unpaid rent, property damage, and legal fees.
When landlords are looking for the perfect tenants who will respect their property, pay their rent on time, and get along with neighbours, some rely heavily on tenant credit checks. But as you'll see below, the limited information provided in a credit report is insufficient when determining the suitability of tenants.
What is a credit report?
A credit report gives you access to a person's personal and financial information. Getting a credit report of a prospective tenant is called a tenant credit check. The information provided in tenant credit checks can vary depending on the source, but they usually include basic identifying information such as their legal name, birthdate, and previous addresses. The information provided in a credit check isn't as comprehensive as what is supplied with tenant referencing as they only include publicly available information from places like electoral rolls, the Judgments, Orders, and Fines Register, and the Individual Insolvency Register.
Private landlord tenant credit checks provide some of their credit history, relevant public records such as bankruptcies, tax debts, civil judgments, and any reported evictions.
What is tenant referencing?
A full tenant reference includes all features of a credit check, along with a wide variety of additional personal and financial information that landlords need to know.
Tenant referencing checks also provide details about a tenant’s previous tenancies such as rent amounts, and any arrears, as well as check out reports. Plus, they can provide other personal information such as undisclosed legal name changes and detailed employment history, which can confirm multiple sources of income.
Tenant references provide a much more complete and detailed overview of any prospective tenant compared to a basic credit check. With all of this data, landlords are able to cross-reference everything for accuracy to ensure that potential tenants are upfront and honest about who they say they are. FInd out more on our comprehensive guide to tenant referencing.
Three reasons why a credit report is not enough
Given the financial stakes are so high when you are looking for the new tenants, it's not worth the risk of relying on a basic credit check. Below we have provided the three main reasons why credit checks provide insufficient information to determine the suitability of prospective tenants accurately.
1. Private debt doesn't mean unpaid rent
Basic credit reports are one of the most common criteria landlords consider when they are looking for prospective tenants as they believe it is a good indication of their ability to pay rent on time. But just because a tenant has a lower credit score due to outstanding private debts doesn't automatically mean that they'll be unreliable as they could be in a much better financial position now and are working hard to pay it off. Additionally, most people will prioritise their accommodation even in times of financial stress to avoid being homeless.
In fact, many studies have shown that past evictions are much stronger indicators for problematic tenants and future evictions. So, even if a tenant does have a poor credit history, a clean eviction history on their tenant reference check is a must more positive sign.
2. Credit checks only reveal reported debt and bankruptcy
A basic credit check only shows if tenants have any adverse credit issues in the past. There's also no way to crosscheck the information to ensure they are who they say they are, and there is no way to know if they've caused problems in the past.
While the majority of significant creditors and money lenders report to one or more credit reporting agencies, there are no legal requirements to. Because not all companies inform credit agencies about debts, especially small businesses, it is always a possibility that a credit report will not show all of a prospective tenant's outstanding debts or payment arrears. Some companies may also sell unpaid debts to collection agencies at a reduced rate, so they may not report the debt at the time if ever.
More importantly, it is common practice for landlords to make deals with bad tenants in which they do not take them to court and forgive rental debts in exchange for them leaving their rental property.
3. Does not cover affordability
While information about a tenant's active and recently closed debt agreements would usually be shown on a private landlord-tenant credit check, including the amount owed; they don't take into account a tenant's affordability. There is actually a big difference between a tenant who has a clean credit history and their affordability.
Basic credit checks will show if prospective tenants have a good history of managing debts, which is a roundabout way for landlords to work out how likely they will be to pay their rent on time. Alternatively, a complete tenant reference provides an overall affordability assessment report which ascertains whether they can afford to pay their rent or not. This is achieved by looking at their total monthly income and comparing it to the total amount of outstanding debts and any other regular outgoing payments.
Final Thoughts
Tenant referencing isn't just reporting on a tenant's credit history, but rather the process of verifying their suitability as a whole, so it's essential when you're looking to tenant your investment property. By having a thorough understanding of prospective tenants, you can make a much more informed decision about who you choose.
How certain are you that your new tenants will consistently pay their rent on time? And will they treat you, your property, and your neighbours with respect? With Husmus, tenant referencing has never been faster or easier. With our comprehensive tenant referencing report, we provide you with all the relevant information you need to turn a difficult choice into a calculated decision. Why take chances with a basic credit report when you can have certainty with Husmus?