Why Using Credit Scores to Screen Tenants Is a Big Mistake

Everything and everyone in the property management industry teaches us to use credit scores to screen tenants. We are taught to pull credit scores and rent only to prospective tenants with good credit scores.

If you are following this practice, you are making a big mistake. In fact, it could be costing you thousands of dollars and a lot of needless headaches.

When you take a moment and think about it, the mistake is very obvious.

Homebuyers Create Turn

If someone has a good credit score and good income (another qualifier we all follow), what are they most likely going to do sooner rather than later? The vast majority, though not all, will buy a home soon (usually in 1-2 years). When they do, you have to ”turn” your rental.

Sounds obvious and crazy now that you think about it, doesn’t it? But that is exactly what the industry teaches, and the advice everyone follows.

You can potentially lose multiple tenants every year as they buy homes. We all know turning a home is not fun, costs money, and takes a lot of work to prep and rent it again.

As a landlord, you want to keep the tenant in the home as long as possible, striving for a minimum of six years. Unfortunately, if we rent only to high credit tenants, this becomes almost impossible because they are buying a home way before six years. By renting to these high credit tenants, we are creating our own turnover and extra work—plus losing money.

If you want to keep a tenant for six years or longer, you should rent to someone with bad credit. This ensures they will not be buying a home anytime soon and, quite frankly, no one else will eagerly rent to them, so they have nowhere else to go.

Finding the Right Tenants

When most people hear this strategy, they immediately respond that if a prospective tenant has bad credit, they won’t pay the rent. Is that what you were thinking?

This could not be further from the truth if you know how to find the right people. In fact, experience shows these tenants are just as dependable with the rent. At the same time, they are more loyal—and headache and hassle free. Perhaps it is because they see the rental as a home for years rather than as just a temporary stop until they buy their home.

How can someone have a really bad credit score, but be a great paying tenant?

Do you know anyone off the top of your head who is a great person (always pays their bills) but may have been in a bad accident or accumulated a lot of medical bills—and now has a really bad credit score because of it? Or what about school loans? Or maybe just a short time ago they went through a divorce or job loss—but are now back on their feet? There are many situations that can ruin the credit score of a solid payer with a great credit score in a very short amount of time.

Does this make that person a bad possible tenant? Does it mean they won’t pay the rent? Should they automatically be ruled out because they have a bad credit score?

Absolutely not! In fact, you should target these individuals. They are extremely thankful and grateful you are willing to work with them, because no one else will. By the way, another benefit of accepting tenants with bad credit scores is reducing your competition. The bad credit tenants who pay every month are grateful and will happily stay in the rental for many years.

So how do you find these prospective good paying, but bad credit tenants?

You start by marketing for them. You must include verbiage in your marketing ads that stating their credit score does not matter. Doing so encourages those with bad credit scores to contact you—and they happily will because everyone else automatically rules them out.

A word of warning—when you market in this way, your response rate will drastically increase, so be prepared. Also understand that a lot of these individuals will be exactly what you do not want, so you must get good at screening them out and finding the right ones. This will take some time, but is it worth it if they don’t move out for years? It’s a lot easier to spend some extra time now filtering through some extra applications than to have to ”turn” a home in a year or two. In the long run, it will save time and money.

Next, be sure to include a screening question asking why their credit score is low. Some people will lie, but most will be honest. If the reason they give concerns you, you can move on to the next applicant. You are looking for the right tenant—the one who would have a great credit score if it weren’t for a life event that destroyed it. So, be patient until you find that person.

If you are comfortable with their explanation, you will need to pull their credit report and try to verify their story. Verifying it will likely require some additional research or calls, but always do your due diligence—as you already do now. If you can’t confirm their story, then move on to the next prospect. Keep doing this until you find a possible candidate.

Judgments and Collections

You will also want to find out if the candidate has any judgments or collections against them. If they do, this is a huge red flag! Remember, the goal is to find a good payer who unfortunately had a bad situation occur in their life that was beyond their control and they are recovering from—not someone who just doesn’t or can’t pay their bills.

This distinction is important because it tells you about the candidate’s mindset when things go south. If your goal is to keep your tenants in the home a minimum of six years, life events will most likely occur. It is very common to have some sort of emergency come up in everyone’s life (divorce, death, layoff, etc.) during a six-year period. So, the question you want to try to answer isn’t if something will happen but rather what happens when it does.

There are two mindsets people can have when these events occur. One is they become selfish and care only about themselves. The have the attitude “I have to do what I have to do to take care of myself and my family” only. These are the individuals who cast you aside and ignore their obligations to you. They are the ones who have judgments and collections against them. These are the candidates to avoid.

Someone with a judgement or collection on record didn’t work out a solution with the company or individual they owe money to and was basically taken to court. For example, they have an $80 collection on their record from a phone company. If they didn’t pay an $80 phone bill, what do you think they are going to do with your $1,000 rent if a life event occurs?

The other mindset reflects someone who during those unfortunate moments communicates with you and tries to work things out. They will create workout agreements (payment plans) and take everyone’s situation into account, not just their own. They have no judgments or collections because they did the right thing. These are the tenants you want.

What you are looking for is someone who may have a payment plan they are paying off monthly. Their mindset was to work out a solution and pay it off. They didn’t just stick their head in the sand and ignore the situation, forcing the judgment or collection.

So, if you want a good long-term tenant, find someone who used to pay all their bills but had an unfortunate situation that caused them to be late on payments. The situation ruined their credit, but now they are back on their feet and have payment plans in place. These tenants are gold. They pay their bills and work things out when things go south—and they have bad credit so they can’t but a home any time soon.

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