So, you’re looking at bringing a tenant into your rental (or maybe you are the tenant looking for a rental). Either way, you’ve likely undergone a tenant screening process, which is the criteria a landlord uses to determine if a tenant is the right fit for their rental.
A tenant screening is like a report card that compiles a person’s financial history, criminal background, identity, and more. This process helps eliminate ineligible applicants and minimize the potential for tenant-related risks.
If you’ve ever taken a peek at a screening report, you might have noticed mentions of credit scores and ResidentScore® and wondered if you were in the wrong place. While it feels like you’re reading a sports magazine with all this talk about scores, what you’re actually looking at are two different types of scoring methods to help landlords make an informed decision about a potential renter.
Let’s explain each of these in greater detail below.
What Is a Credit Score?
Your credit score is a three digit number that can impact every aspect of your finances, from car loans to mortgages to credit cards and more. A credit score represents your overall credit risk and ability to pay your loans and monthly bills. Often known as a FICO score, or Fair Isaac Corporation score, credit scores are a standard method most lenders rely on to settle your eligibility for loans, credit cards, limits, and even interest rates.
How Does It Work?
While there are many different types of credit scores and ranking systems, generally, the higher the credit score, the better. The typical ranges include the following:
- 300-579: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very Good
- 800-850: Excellent
A high score can be a good sign that the applicant has shown positive credit behavior, while a low score may indicate that the applicant has been less responsible with their bills.
To add a little bit more complexity, you can have multiple credit scores, and they often vary depending on the consumer reporting agency that is analyzing your score. As there are three different bureaus to pull from—Experian, Equifax, and TransUnion—you may notice different reports in each one.
How Are Credit Scores Determined?
Credit scores are based on the information provided by your credit reports. Each time you make a payment on a car loan or mortgage, for example, credit bureaus receive a report. If you miss payments or default on a loan, that information is also shared with consumer reporting agencies.
A typical credit score is calculated based on these factors:
- Total Payment History: This includes open credit lines, previous payments, missed or late payments, debt collection, etc.
- Debt-to-Credit Ratio: This ratio represents the credit you currently have divided by the credit available to you. In other words, if you’re maxing out your credit cards instead of leaving a gap between your balance and total approved credit,
- Types of Accounts: A good rule of thumb is to use a variety of credit lines over time, as credit bureaus like to see that a person can manage different types of credit at once.
- Credit History: This can mean that the longer you’ve built a credit history, the more reliable you may look to a lender or creditor.
- Credit Inquiries: If a person applies for credit frequently, it may negatively impact a credit score, as it shows that you might be taking on more debt than you can pay off.
To summarize, a credit score is a number created by three major credit bureaus to represent a person’s overall credit risk. It can vary widely depending on your individual habits and fluctuate over time. The better the credit score, the more likely you are to qualify for loans, rentals, and more.
What Is A ResidentScore?
A ResidentScore is a scoring system designed specifically for tenant screening from TransUnion. This score is similar to a credit score except that it uses an applicant’s credit information to determine their risk for negative rental outcomes. (In this case, “negative" rental outcomes include evictions, 3+ late payments, and insufficient funds—things often categorized under Landlord’s Worst Nightmare.)
These data points were compiled after TransUnion analyzed almost 3 million residents over a 12-month lease term, taking credit history into account to understand which key points most often lead to the risks mentioned above.
ResidentScore looks at five factors, including the following:
- Payment History: Includes all lines of credit, including negative and positive payments
- Credit Usage: Shows how much credit is being used by the applicant
- Credit History: Measures the overall length of credit history and types of credit lines
- Credit Availability: Includes all forms of credit open to them
- Inquiry History: Shows how frequently the applicant seeks additional credit
How It Works
After reviewing the applicant’s credit data, ResidentScore provides a number in a range similar to typical credit scores, with a rating of 350-850. The acceptance rate is as follows:
- 350-523: Decline
- 524-537 Conditional
- 538-559: Low accept
- 560-850: Accept
With a ResidentScore, the higher the score, the lower the risk to landlords. The lower the score, the higher the risk.
While it’s not a guarantee that your applicant will pose no risks to your property, nor should it be the only criteria used when screening a tenant, this score is a helpful tool that can provide you with greater insight. And when it comes to gathering details about a potential candidate for your rental investment, there’s no such thing as too much knowledge.
ResidentScore vs. Credit Score
While credit scores are an indicator of a potential tenant’s ability to pay off a loan, a ResidentScore looks more closely at a tenant’s behavior, by analyzing their potential rental performance.
Here are some benefits of ResidentScore over a typical credit score:
- ResidentScore identifies 15% more evictions and 19% more skips than typical credit scores
- ResidentScore scores more applicants who have minimal files (can score all applicants with at least one account on their credit report)
- ResidentScore is built specifically to identify the likelihood of eviction
When it comes to assessing potential tenants, you want all the information possible to help you make the right decision while avoiding the expensive costs of an eviction. A credit score tells one story, but the ResidentScore is more tailored to the rental industry.
Getting the Most of Screenings
As a landlord, you want to find an ideal tenant. Methods like credit scores and ResidentScores can help you get there. Involving methods like ResidentScore ensures that you aren’t stuck basing your decisions on the same algorithms that a bank might use.
By relying on several screening methods, you can cast a wider net on your applicants and make better, more informed choices. And a better decision usually means a more positive, lucrative rental outcome. Which really is the goal in the end, right?
Check Credit and Resident Scores on TenantCloud
Screening tenants is easy if you’re a TenantCloud member. You can choose several screening options in your account and run a full background and credit check right from there. Our most advanced screening is our Full Check, which gives you everything you need to make a decision for just $39.
A Full Check includes a full credit report with Resident Score, plus a bankruptcy search, advanced criminal and eviction search, and identity verification. Visit the Help Center to learn more.
Learn more: 9 Best Tenant Screening Services for Landlords
Sources:
https://www.mysmartmove.com/blog/residentscore-tailored-tenant-screening
https://www.equifax.com/personal/education/credit/score/articles/-/learn/what-is-a-credit-score/
Disclaimers:
*This article is intended to provide you with helpful information and is not legal advice. Please consult your legal counsel for advice on your specific business operations and responsibilities. We are not credit experts. Trademarks used in this material are the property of their respective owners, and no affiliation or endorsement is implied.
