Look Beyond The Score
Look Beyond the Score
Credit reports have always been considered the single most valuable screening tool because of the wealth of information contained in the report. However, reading through a credit report is one thing, understanding the substance of the report may be quite another thing.
It is important to educate yourself on how credit reports are complied and how credit data is presented in reports. There can be variables in collection and presentation of credit data among the three major credit bureaus. When you choose a tenant screening vendor and select from credit screening options, make sure you know what you want before you order. Study a sample report to familiarize yourself with its data presentation and terminology.
An available report option is a scored credit report. Such an option is generally well worth any additional fee imposed by the screening vendor. In fact, many landlords prefer to use a scored credit report as this quickly gives them a benchmark to compare against their rental qualification criteria. They choose a scored credit report to make a more consistent, objective determination of the applicant’s creditworthiness. The cost is minimal compared to the time and effort that must be expended to adequately protect your rental investment. Furthermore, in most states, a credit report fee can be collected from the applicant.
The three major credit reporting agencies in the United States are: Experian, Equifax and TransUnion. Each reporting agency gathers information from various credit providers and supplies credit data on individual consumers, using its own formulas for calculating credit scores.
Information in the credit file is compiled into a three-digit credit score. The numeric value helps predict future credit performance based on past credit behavior. In general, the higher the score, the more likelihood the applicant will have the ability and willingness to pay as agreed and the less likelihood of default/delinquency.
The most commonly used credit scoring model is the Fair Issac Model expressed as a FICO score. In 2009 Fair Isaac Corporation, officially adopted the brand FICO™ as its corporate identity. The company retains its legal name, Fair Isaac Corporation, however, the company logo, website, and other company materials now reflect its new identity: FICO.
The FICO scoring range is expressed as between 340 and 850. Many landlords consider a good score to be 700+. However there is no magic score that guarantees a good tenant. There are life events such as extended illness, death, divorce, or student loans that, while having a major effect on credit scores, may warrant consideration under your rental policies, your particular type of property, and market conditions. Each landlord must set his rental criteria at the level of risk that is acceptable for his business. Some landlords will be willing to accept more of a risk than will other landlords.
FICO scores take into account the consumer’s payment history (35%), amounts owed (30%), length of credit history (15%), amount of new credit (10%), and the mix of credit types (10%). If your applicant does not use credit or is newly establishing credit you will likely not be able to obtain a credit score. If a score cannot be calculated the report will carry a notation such as “risk score not calculated due to lack of credit history” or note that the credit file does not contain any trade-line account which meets the following criteria of (1) the status date is within the last six months and (2) a balance updated within the last six months.
A score by itself is indeed only a number, but if a credit report is the only tenant screening done, then a credit score is likely to provide the best guess of future credit behavior.
While a credit score alone won’t predict every aspect of the applicant’s future behavior, for those landlords who “know the score,” a credit score speaks volumes.
It may be, however, that the reasons behind that score speak even louder. By reviewing the “reason codes” on the credit report as to why the score was not higher, a landlord can focus on patterns of behavior that could indicate potential problems or highlight current difficulties. Looking beyond the score to recognize potential problems is a way to reduce risk.
There are red flag conditions that can exist even with an acceptable credit score. Perhaps there are occasional missed payments even though a serious pattern of delinquency has not yet been established. This fact coupled with other information in the report or negative information received from previous landlords or employers could indicate potential trouble for the future. One red flag indicator is late or skipped utility payments. If utilities are unpaid, think that rent will fall behind very soon. A collection item for a previous utility balance requires careful investigation to evaluate the root cause and/or subsequent action.
The scored credit report will show the reasons, negative reasons, why the credit score was not higher. The credit bureau’s risk score factor reason codes allow credit reviewers to better understand the consumer’s credit behavior, warn of potential future problems, and indicate actions that could help improve the individual’s credit score.
Each reason category has an approximate weight assessed against the total credit score. Reason codes can be categorized as follows:
- Previous payment history (credit performance – 35%)
- Ratio between current balance and credit limit (level of indebtedness – 30%)
- Length of credit history (15%)
- Types of available credit (10%)
- New credit inquiries (10%)
The following code descriptions are only a sampling of the several dozen code explanations that could be shown on credit reports.
- Serious delinquency
- Serious delinquency and public record or collection filed
- Derogatory public record or collection filed
- Time since delinquency is too recent or unknown
- Level of delinquency on accounts
- Too many accounts with balances
- Number of accounts with delinquency
- Amounts owed on accounts
- Length of time accounts has been established
- Proportion of balances to credit limits on revolving accounts is too high
The following credit message illustrates how negative codes might appear on a credit report:
Credit Score: 561 (Fair Isaac Model)
Score Factors:
Account(s) not paid as agreed and/or legal item filed
Length of time (or unknown time) since account delinquent
Number of accounts delinquent
Proportion of balance to high credit on bank revolving or all revolving accounts
Credit reports can also carry advisory messages to alert of potentially fraudulent or inconsistent information based on the data submitted for input – address, date of birth, phone number, driver license, and Social Security number.
For example, a report option provided by TransUnion offers:
ID MISMATCH ALERT message appears when: the input address, SSN or surname does not match what is on file; when a minimum of four inquiries have been made against the file within the last 60 days; or when an invalid ZIP code is entered.
HIGH RISK FRAUD ALERT messages appear if: address, SSN, or phone number have been used in suspected fraudulent activity; the information on an application is inappropriate, such as a commercial or institutional address; or if the SSN has not been issued by the Social Security Administration or is that of a deceased person as reported by the Social Security Administration
Special messages may highlight specific credit file conditions such as:
- Presence of consumer statement
- No subject found
A good source of training on how to read credit reports can be found on the major credit bureaus’ Web sites as well as major Internet based screening vendors’ Web sites. Knowing how to correctly interpret credit report information is a matter of education and experience and will be the key in your selection of tenants.