Updated February 2021
Credit scores are one of the primary factors used by many landlords to screen renters, but what is a good credit score for tenants? Understanding how credit scores can be used to screen tenants is important for landlords when reviewing rental applications.
Choosing reliable tenants is an important foundation for your business; reviewing credit scores can help you to do that more effectively. While the credit score isn’t always included on rental applications, it is typically reviewed as part of the screening process.
What type of credit score history should you be looking for?
Today, we’ll share some insight into what we see here at RentPrep, as well as what you can expect to see from credit bureaus in the rental industry at large. With this information, you can make the most of your real estate business.
Table Of Contents On The Minimum Credit Score For Renting
Learning about credit scores and how they work will help you improve your tenant screening process. Utilize this information to choose the best tenants possible.
- What Is A Credit Score?
- What Is A Good Credit Score For Tenants?
- What Should Be Your Minimum Credit Score For Renting?
- How To Get A Tenant’s Credit Score
- Factors That Influence Credit Scores
- The Difference Between Credit Bureaus
- Other Factors That You Can Use To Qualify A Tenant
- Better Screening, Better Tenants
Before we get into what qualifies as good credit to rent a house, it’s important to get an understanding of what a credit score is and what it represents. Using this number as a screening factor without knowing its meaning would be a mistake; take time to learn more about credit scores right now.
A credit score is a number that is generated by credit bureaus based on payment history and other information found in your credit report. The credit score will fall in a range from 300 up to 850. Where the number falls represents what type of credit risk you carry for lenders.
What does that really mean?
Lenders use credit scores to estimate how likely you are to pay off money that is loaned to you. When applying to buy a car or house with a loan, for example, the lender will use your credit score to determine if you are eligible or not.
Landlords, however, are not lenders in the traditional sense. How are you going to use the credit score of prospective tenants to run your rental business?
Landlords use credit scores for the same base reason as lenders: to determine how likely a tenant is to pay their rent in a timely manner. By reviewing a prospective tenant’s credit report, you can get an idea about how they have handled payments in the past on loans, credit cards, and other things.
Anyone with a credit score over 670 or higher is already at or above the national average for Americans. A good credit scoring for renting is going to be less compared to a good score for buying a home.
So, if your renter has a score of 670 or higher, that’s a very good credit score for most rentals. Most landlords are looking for a score somewhere between 600 – 650 since renters don’t have the credit history of making mortgage payments to boost their credit score.
Another important thing to know is that what is considered to be a good credit score could vary from credit bureau to credit bureau. This is because each of the credit bureaus has its own way of calculating the number.
Generally, however, any credit score over 670 can be considered to be a good credit score – regardless of which bureau it came from. Credit scores from VantageScore are good at slightly lower numbers such as 661 and above.
What is the average number you can expect to see when checking into what should be considered an acceptable credit score for renting?
Here at RentPrep, we run a lot of credit checks for the landlords who use our services. This gives us some insight into what you might see from renters. We are not the only ones who have insight into acceptable credit scores, however.
These are some of the most popular numbers used as a measure of what is an average credit score for tenants in America.
This is the exact average score we have seen in one year of data among all of the reports we’ve completed. This means if the score is lower than 649, it should be at least a little concerning. According to Experian, an acceptable credit score to rent an apartment is around 638.
These numbers are based on the data we have here at RentPrep. We run thousands of credit checks every month and this is a result of our findings. Understand that this is not based on all renters, but it is based on renters of landlords who run background checks.
673 – 699
According to an article from ValuePenguin, the “average” credit score of Americans in a 2021 report was 688 for the Vantage scoring model and 711 for a FICO model. Keep in mind that this is not industry-specific; it takes into account everybody and not just renters. Renters statistically have a lower credit score than homeowners.
According to Time.com, the most at-risk demographic are adults aged 20 to 29 who have an average score of 662. This score is considered fair, but any score lower than 579 should start raising serious concerns.
New tenants often wonder the same thing: what credit score do you need to rent an apartment? These same tenants might not have any idea what their credit score is, and that can lead to some confusion for both prospective tenants and you, their future landlord.
What happens if their credit report comes back and says they have insufficient credit history to create a credit score?
More often than not, a designation of Insufficient Credit means the tenant does not have enough tradelines or credit-impacting accounts. We often see this with students or younger people, older people with no credit activity in years (family is taking care of them), and a spouse who has nothing in their name.
In these situations, it will be up to you to determine whether or not you can prove the tenant’s financial risk through other means.
This is going to be based largely on two factors: rental location and rental quality.
These two factors play a major role in the price of the rental as well.
If a rental is in a bad location and is in bad condition, you’re not going to be looking for 650+ credit scores. You’ll need to lower your credit score minimum for that apartment. However, if you have a higher-end rental in a good neighborhood, you can have a minimum tenant credit score of 700.
Remember, the type of good credit to rent a house or a rental property with a larger price tag can be higher than the acceptable credit score for renting a small property with less risk attached to it.
The minimum credit score you determine should reflect the risk your rental business is taking on by renting out the property. If there is significant risk, you want to make sure your credit screening shows this. If you are willing to take on tenants who show a higher risk, you can lower your minimum score to allow these tenants a chance.
Landlords who haven’t used credit scores as a screening factor before or are new to the rental industry might not be sure how to find out this private information about their tenant. Do you simply ask your tenant to tell you their credit score? Can you trust this information?
No; that is not the right way to find out a tenant’s credit score.
Here at RentPrep, we offer two services that provide tenant credit score information. Our credit check is a pass/fail based system that provides you a range to choose from. This does not provide the specific credit score.
We also offer our TransUnion Full Credit Reports, formerly known as SmartMove reports, for those who would like to see the specific credit score with a full credit report.
Credit score is an important factor, but should not be the only consideration when choosing tenants. I’d rather rent to a tenant with a bad credit score and no evictions vs. a great credit score and 2 evictions within the past year.
If you want to learn more about how credit scores can and should be used during screening, this complete review can help. This will give you insight into different ways to run a credit score, the benefits of each method, and how you should consider this as you move forward with business.
To use credit scores as part of the tenant screening process, you don’t necessarily need to know what factors influence credit scores. Understanding what goes into the score, however, will help you see the bigger picture of what these scores really represent.
Some of these factors will matter more to you as a landlord than others. If a tenant can explain their below-average credit score as a result of factors that don’t affect your business, you might be able to work with tenants who may otherwise seem like the wrong fit.
Remember, each credit bureau uses a different formula to determine credit score, so each factor considered will likewise vary.
Payment history is a huge factor in all credit card equations. Missing a single payment can cause a big hit to credit score because that shows things may not be paid on time. Credit score is meant to put a number to that type of risk, so it makes sense that this factor has such a large impact on the overall score.
The next important thing in most credit score calculations is the amount of credit you are actively using. Sometimes, this is called your credit utilization ratio. Essentially, this factor compares how much of your credit you are using versus the size of your open lines of credit.
The idea of considering credit usage is that it gives you a quick look at how reliant you are on non-cash funds at this time. That can be a good or bad sign of your financial literacy depending on the number.
Generally, lenders want to see this ratio lower than 30%.
Credit history considers how long the person in question has held credit accounts. Your credit score will factor in:
- How long you held your oldest account
- How long since you added an account
- What the average age of your credit account is
Having a long credit history usually helps create a better, higher credit score.
Having different types of loan accounts (i.e., credit card, student loan, mortgage) shows that you have managed a variety of credit products successfully. Lenders like to see this because it shows lower risk since you successfully handled this type of credit mix.
Finally, credit score also takes into account if you have recently opened new accounts and received a high number of hard credit inquiries. Showing a high number of new accounts or inquiries may show that you are a high risk to lenders, so these activities can lower your credit score.
The three main bureaus (Equifax, Experian, and TransUnion) pull together credit history information to give a credit score to lenders and financial institutions. Why are these numbers different?
As mentioned, each credit bureau has their own information to draw from. Even if they use the same formula for calculating credit score, the information accessible to each may be different.
Before highlighting the differences in how each of the bureaus calculates credit score, it is important to understand how scores are calculated.
You already know about the factors used to create a credit score:
- Payment history
- Credit usage
- Credit history
- Credit distribution
- Recent credit changes
There are different credit scoring models used to take all of these factors and morph them into a single, three-digit credit score. Depending on what type of lender is checking the credit score, the best scoring model may vary.
It is normal for an individual’s score to vary between credit bureaus because each scoring model puts the weight on something different. This is why some types of scoring models are better than others for loans, while credit card companies may prefer a different model.
The Differences In The Bureaus
Conceptualizing the difference in scoring systems at each credit bureau can be difficult without more direct comparisons.
FICO is one type of credit score that provides a credit score based on payment habits and the amount of debt the individual currently has on their credit lines. Experian, Equifax, and TransUnion all use VantageScore credit scores, which use the same factors, but a different formula.
While a FICO score is just a number, the credit reports issued by Experian, Equifax, and TransUnion all include more detailed information as well.
The exact information you get from any report will be dependent on where the report comes from, what credit scoring model is used, and what information you request.
Are you having trouble using credit score as a major determining factor? Whether this is because you don’t have many qualified tenants applying or you simply want to give more tenants a chance, there are other ways you can judge the risk level of a prospective tenant besides their credit score.
If a tenant you feel good about applies, but they do not have the necessary credit to rent the property, you can offer them the option to have a cosigner.
A co-signer would be included in the lease agreement as a responsible party if the primary tenant does not pay their rent. This gives you a backup avenue to protect your investment.
If a tenant has a good reason for a low credit score, you can take a closer look at their current financial situation through proof of income or rent receipts.
For proof of income, your tenant can provide pay stubs or bank statements to show you they have financial stability and will be able to pay rent on time. If the tenant was recently renting, they can show you rent receipts from where they are/were currently renting so you can get a better idea of their rental history.
What is a good credit score for tenants looking to rent your properties?
With the information you learned today about credit scores and why a credit score can be a good way to screen tenants, you should have a better idea of what to look for.
Remember, credit score can show you:
- How risky it might be to rent to a tenant
- If they have a record of keeping up with payments on time
- If they have many financial obligations right now
Knowing these three things can help you feel more confident in your decision to deny or accept a prospective tenant. Remember, tenant screening is a process you should put some time and effort into. Ensuring you get the right tenants into your property will help hold your bottom line as you find success in the rental industry.