The anatomy of a credit report

Possibly the most devastating step you can make in real estate is selecting poor tenants. Bad tenants can do everything from wreck you house to refuse to pay rent (and then continue to reside on the premises for a couple months while you carry through the eviction process). Needless to say, it's really important to properly screen your applicants.

While there are many things you can look for, one tool that EVERY landlord should use in the credit report. But first you need to know how to read one. Even if you intend to ever be a landlord, this is probably good information to know so you can read your own credit report.

First of all, to legally obtain someone's credit report you need written permission to do so. At the end of the application that I put together a separate page that gives our company permission to run a credit check. If this page isn't signed, the application is discarded. Note that some companies can get around this "written permission" law including credit card companies.

The first thing you need to do is obtain the credit report. You can find any number of sites that offer this service to you by googling the phrase "tenant screening", but here's a few to get you started:
Tenant Verification Services
Certified Tenant Services
American Tenant Screening

Biff and I use TVS, but your mileage may vary. In the end all these services retrieve you the exact same thing. A credit report + score.

So now you have the tenant's credit report. What does this all mean??? Let's break it down. At the top there should be some simple data like Name and Social Security Number to ensure you have the right report. Somewhere below that you should see and area called "Special Messages".

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S P E C I A L M E S S A G E S
***TRANS-ALERT: CURRENT INPUT ADDRESS DOES NOT MATCH FILE ADDRESS***

In this example (pulled from a real credit report) we can see that there is a mismatch between the address we provided the credit agency and the address the agency holds. Usually this is not a big deal, especially if your tenant moves around a lot.

We did have one tenant who had been an identity fraud victim, and that was also noted in this section with a warning.

The next section is a very important one (though it might not exist for applicants with no data to report). It's the list of recent and outstanding collections against the applicant. These reports were designed to be displayed on some super wide sheet of paper and so some creative formatting is necessary to make them readable. I've taken some liberties in formatting to make this explanation easier (and highlighted the columns we're most concerned about). (Also note that these lines are begin taken straight out of an applicant's credit check. They are genuine. Of course I've changed all the data...)

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C O L L E C T I O N S
SUBNAME SUBCODE ECOA OPENED CLOSED $PLACED CREDITOR MOP
COLLECTRITE 08306003 I 09/99 80 MEDICAL O9P

We can see here that a collections agency went after our applicant for an unpaid fee. A little closer examination shows that the debt was from medical bills and was only for $80, and this occurred back in 1999.

ACCOUNT# VERIFIED BALANCE REMARKS
679984 05/02 0 PAID COLLECTION

Here we see that in 2002 the amount owed was paid in full and the collection was closed. This is something very imprint to note, as it can show a dangerous history. Most likely, given the amount, it was a bill that was just put aside and forgotten about. Or perhaps there was a dispute between the applicant and the medical company (a hospital?). Let's look at the applicant's current credit state.

Below this (though some reports may vary in order of presentation) you should see a listing of all the applicants account and how much they owe on them.

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C R E D I T H I S T O R Y

SUBNAME SUBCODE OPENED HIGHCRED TERMS MAXDELQ PAYPAT 1-12 MOP
CITIBANK V 1AC7001 09/01 $ 508 MIN10 111111111111 R01

Looking through the first line we can see that our application has an account open with Citi Bank. That person opened the account in September of 2001 (under the OPENED category) and has, at any one time, had a maximum charge of $508 on it. How relevant is that? Let's look at the next bit of info.

ACCOUNT# VERFIED CREDLIM PASTDUE PMT AMT PAYPAT 13-24 ECOA
601xxxxxxxxx 01/06A $7000 $ 0 $ 10 111111111111 I

Yes, we do get the account number in the credit report. This is a very good reason to check up on your own credit every once in a while. But the only things we're concerned with here are the credit limit and the amount past due. The credit limit is rather self-explanatory, even though our application has never held a charge of more than $508 on this card, they could charge up to $7000. That's a very good sign for us. An even better sign is found under the PAST DUE column. This is the amount of money that the applicant couldn't pay last pay period. A total of $0 means the applicant paid their bill in full. Very good news.

Finally to the last set of data.

COLLATRL/LOANTYPE CLSD/PD BALANCE REMARKS MO 30/60/90

CHARGE ACCOUNT $ 475 48 0/ 0/ 0

All the concerns us here is the applicants current balance. Remember that the more your tenant owes, the less likely they will pay in full, and the more difficult thier cash flow becomes. That's when problems can happen. In this example, with a balance of only $475, it's likely that the applicant will pay this off in full.

The remakrs section can contain various random data, but one important remark you'll often come across is "CLOSED" (or some variation thereof). This indicates that the credit line was paid off and closed, which is usually a good thing.

Now this is just one account listed on the card. In credit report I pulled this example from, the applicant had 20 different accounts. Some were for cars, some were credit cards, sometimes you'll even see mortgages here (one of our current tenants used to own, but sank so much money into the house that it left him bitter towards the entire "owning property thing". While I can't agree with him, this is wonderful for us because he's a great tenant and will keep paying us rent for years to come instead of buying a house and paying the bank.

So what are some things to look for in this section? One warning sign that I watch for are vehicles. Most everyone has a car loan (or, if they are married, two) and so that's not such a big deal. But if those loans seem out of scale with their salary (you did get income information in your application, right?) then they probably are and that can be a warning sign.

Another hazard is the "past due" area. If the applicants don't pay their bills in full that can be bad. Especially if the totals they left unpaid are large. This could indicate that their debt is out of control and you could be providing free housing for a couple of months while you persuade them to relocate (via eviction).

Everyone has their own systems for evaluating risk and determining what a safe tenant ought to look like. The important thing isn't how your system works, it's that you HAVE a system and you evaluate every tenant equally by it. I don't care if that tenant is your nephew, run the credit check. This can save you thousands before troubles begin.

In the next section we can see what many of us have heard about. The "Recent Inquiries" section.

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I N Q U I R I E S
DATE SUBCODE SUBNAME TYPE AMOUNT
06/01/14 ZNY08986312 TENANT VFC S
05/01/16 NDT93259725 DAIMLRCHRYSL

Here we can see the most recent inquiries into the applicants credit in Year/Month/Day format. This applicant's credit has been rather quiet. You can see that Biff and I ran our credit check on January 14, 2006, and that about a year before that Chrysler ran a check. Looking further up we can see that the applicant did, indeed, end up buying a car from Chrysler and financed it through the manufacturer.

Some people swear that too many inquiries is a bad sign, but I have to come across a situation where there were enough queries into an applicant's credit to make me think twice. As always, your mileage may vary.

Finally we get to the summary of the credit report. The credit score.

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M O D E L P R O F I L E * * * A L E R T * * *
*** ALERT: Score: 702: 40 14 13 99 ***

From this we know that the applicant's score was 702. How good is that? In the system the scores range, I believe, from somewhere in the 500's to about 820. Anything near 800 is perfectly flawless credit. Anything below 600 is very high risk.

Biff and I have a general rule that anything above 700 is considered acceptable in our system. If their score is that high they are probably a near-sure thing when it comes to collecting rent. So despite a few misgivings about the applicant's history (including the medical collection) we decided the accept the applicant (the applicant ended up at a different house).

But if an applicant's score is below 700 then we inquire further. It could be that the person just recovered from a medical disaster (but remember, we already know if they currently owe anything) . The gentleman who had a sour experience with owning homes currently has a credit score in the 630's. However Biff and I decided that we would make an exception for him. We haven't regretted it, but we didn't make that decision lightly. We verified his employment, made sure there were no outstanding collections against him, and finally met with him and his family. The lesson here is that every rule can be broken, but make sure you understand why you are breaking it.