Tenant Credit Scores

One of the most widely used assessment tools, and fast becoming the most controversial, is the FICO credit score. Founded by Fair, Isaac and Company in 1956, it was pitched to lending institutions to measure consumer credit risk. By 1989, they introduced a general scoring system with values of 300-850 used to evaluate a borrower’s credit worthiness and propensity for default. In the 1990s, its application extended to qualifying for mortgages. Scores above 640 were deemed reliable.

FICO score utilization spread from banks to employers, and particularly to property managers for evaluation of default risk. Technology has virtually placed the life story of every applicant at the fingertips of property managers to scrutinize for attributes and impediments. While tools like FICO can be extremely beneficial, they are not without their limitations and faults. In fact, one can easily derive a skewed and one-dimensional assessment of a rental candidate’s worthiness.

FICO uses three credit bureaus for its credit scoring models: Experian, Equifax, and Transunion. Mathematical models form the basis for risk stratification. These three credit reporting agencies form an oligopoly, leaving consumers with no say or choice over the influencing factors. Touted as a competitor to FICO, VantageScore is another private collaboration of the same three credit bureaus, utilizing the same 300-850 scoring values. While there may be a modicum of increased flexibility and input with this system, the innate limitations are still present and FICO is used in far greater percentages by lenders and landlords.

The limitations and bias inherent in FICO scores

FICO has proclaimed that before their credit scoring, there was no unbiased evaluation system for loan applicants. They called their scoring system the democratization of credit. Yet, the truth is that our data has become commoditized, monetized legal tender. Our life experiences and earnings are distilled to a number that is supposed to depict our trustworthiness and reliability. Credit scores are well-known to contain racial and socio-economic bias, with elevated degrees of disparity among Black and Latino populations who have substantially lower scores. There are inaccuracies and omissions of information that could legitimize a broader populace, particularly Hispanics and Black Americans. Data like cell phone, utility, and rental payment history can provide a fuller picture of worthiness and reliability.

So, what data comprises the FICO formula? Historically, they have looked at these areas to render a score:

But, what if you’re among the “credit invisible,” those with no lines of credit or a borrowing history? Without that data, you can be invalidated even if you are financially viable. Statistically, 1 in 10 Americans are credit invisible. This demographic can include Black Americans, Hispanics, residents of low-income neighborhoods, young consumers, immigrants, female victims of domestic abuse, and the newly divorced. This “magic number” infiltrates our lives on multiple levels and has become for many, a quality-of-life issue.

The system is error-prone and broken

According to the most recent study in 2013 by the Federal Trade Commission, or FTC, one in five people have errors on their credit reports. Inaccuracies included old, irrelevant data, false collections data, and the wrong person’s data attributed to the account of a person with the same name. In 2017, 65 percent of complaints filed against credit bureaus pertained to inaccurate information on credit reports across all three bureaus. The Fair Credit Reporting Act mandates that when errors are found and challenged, they must be investigated and fixed. However, many people are unaware of the errors or the process involved for correction.

Democratic and Republican members of the House Financial Services Commission agree that the current system of credit scoring is broken and in need of extensive repair. Democratic Chairwoman Maxine Waters noted that part of the problem is that to credit bureaus, we aren’t customers, but goods. We are assessed by quantitative factors, not qualities. There are ongoing legislative efforts to promote precision and equity. The goals are to improve reporting with strict guidelines around accuracy. FICO and Experian are reportedly making changes to include consumer data that can alleviate credit invisibility as well as broaden reliability factors.

Focusing on FICO scores can limit your pool of worthy rental applicants

Property managers must have access to assessment tools that minimize risk. They’ve had to place their faith in the values of an imperfect evaluation process. It has not only been a disservice to consumers, but to those who face the arduous and ongoing task of securing reliable tenants. Long before the pandemic chaos, there have been factors that handicapped both the property owner and the lessee in the rental market. By incorporating a broader data set, and through the cooperation of credit bureaus and legislative bodies to amend inaccuracies and miscalculations, both landlord and prospective tenants will achieve their goals on a more level playing field.

Daniel Berlind is the Founder and CEO of Snappt, a San Francisco-based software company that helps multifamily housing companies prevent tenant and financial fraud. A former real estate executive, innovator and entrepreneur, Dan founded Snappt in 2017 after running his own property management company where he recognized a significant, industry-wide financial issue in the billion-dollar apartment rental industry. The company’s technology aids and streamlines the apartment rental process by reducing bad debt, increasing asset value and minimizing the application review process. Previously, Dan was a professional baseball player for the Chicago Cubs and Minnesota Twins after attending California Polytechnic State University.