Why landlords are better off using alternative credit scores
How do you vet tenants before they sign leases? Chances are you ask for recommendations from previous landlords or credit scores from Experian, Trans Union or Equifax.
Recommendations are, and always will be, a huge help to you, but what do traditional credit scores actually tell you? That a prospective tenant pays his credit card bills on time? This information can be useful, but only to a certain degree. Here's why.
How demographics impact your landlord credit check
Statistically, most renters are young adults and professionals. According to rentbits.com, 78 percent of people aged 25 and under rent homes and apartments. Of those between the ages of 25 and 30 years old, about two-thirds participate in the rental market.
Wait a minute - what does age have to do with a person's credit score? Quite a bit, depending on how you look at the situation. Credit bureaus don't factor in a person's age when calculating credit scores - they focus on credit history, types of credit, length of credit, payment habits and other factors. However, what if certain demographics are known for not taking out loans or owning credit cards, such habits will show up in their credit scores.
For example, a survey from Bankrate noted 63 percent of people between the ages of 18 and 29 years old don't own credit cards. This means credit bureaus have less data to include in their reports, bringing up the following issues:
- A few bad instances (a late payment, for example) could tarnish what would otherwise be a fine credit report.
- When not enough information is available, credit bureaus won't even bother developing reports.
At the end of the day, you're either dealing with reports that don't accurately reflect a persons' financial habits or those that don't provide enough information.
The alternative credit data option
Even though some of your tenant applications may not have a lot of traditional credit data under their belts (if any at all), they've probably paid utility bills and rent before. The problem is, traditional credit scores don't take this information into account.
In contrast, alternative credit data reports track utility, telecom and rental payments participants include when they set up accounts. PRBC Main Street's solution, for example, continuously adds rental payment data to its report whenever a person pays his or her landlord. This information obviously aids landlords trying to make the right call.
For example, suppose you interview someone who has two months left on his current lease. In person, everything checks out, and he has a good recommendation. You tell him to come back in a month and you'll sign a lease.
However, upon pulling his latest PRBC report, you notice that he didn't pay rent for the second-to-last month on his rent. This indicates that he's stopped caring about paying his current obligation. You don't want to sign a 12-month lease with someone who's going to fall behind in the last two months.
What alternative credit data products provide is consistency and accuracy. Instead of referencing credit scores that are more than two months old, you'll be able to reference data that's truly up-to-date, containing the latest payment information in your tenant applicant's profile.