Renter Credit Scores Increasing: Good News for Landlords?

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© Provided by The Motley Fool Renter Credit Scores Increasing: Good News for Landlords?

Not all rental units are owned by major property management companies with plenty of financial resources behind them. Rather, a large percentage of rental homes are owned by mom-and-pop landlords — individuals who count on the rent they collect to pay their own mortgages and cover their expenses.

If you fall into the latter category, you know how important it is to vet a tenant before agreeing to a lease. The last thing you want is to rent out your home to someone who’s not going to keep up with the rent.

Of course, one key step in vetting a tenant is to run a credit check. The higher an applicant’s credit score, the more that person can be trusted to pay rent in a timely fashion.

In fact, new data indicates that landlords may be imposing higher credit score standards on tenants. Should you do the same?

The importance of good credit

The average credit score needed to rent a U.S. apartment has gone up one point per year for the past three years, reports RentCafe. And in a study of over 5 million leases nationwide, the average credit score among U.S. renters was 638 in 2020.

Not surprisingly, there was variance in credit score by building type. High-end buildings had an average credit score of 669, while midlevel buildings had an average credit score of 626. For low-end buildings, the average was 597.

Of course, imposing stricter credit score requirements is a smart move for landlords. Technically, there’s no such thing as a minimum credit score to rent a home. Each landlord can make their own decision with regard to what credit score to accept. But if landlords collectively start making it a bit more difficult for people with poor credit to rent, it could motivate more tenants to work on building better financial habits that lend to improved credit. The result? Fewer delinquencies and late payments — and more consistent cash flow for landlords.

What should your credit score requirements be?

Deciding what minimum credit score to accept from your applicants is a personal decision. One landlord may be comfortable with a minimum score of 620 (which is generally considered the minimum to qualify for a mortgage), while another may want a 650 or higher.

What you should know is that according to Experian (OTCMKTS: EXPGY), one of the three major credit bureaus, a credit score of 580 to 669 is considered fair, and anything under 580 is considered poor. Meanwhile, a score of 670 to 739 is considered good, while scores 740 and above are very good or exceptional.

Landing on a single arbitrary credit score may not serve you well when vetting tenants. For example, you may decide you won’t accept a score below 620, but there’s really not much of a difference between 610 and 620 when it comes to creditworthiness. As such, you may want to adopt a more flexible approach to vetting tenants and look at the big picture. If an applicant has a score of, say, 600 (the lower end of fair) but also has a steady job an employer can speak to and a healthy amount of money in the bank, that person may be less of a risk than someone with a score of 620 whose income is variable and who has few assets.

The Millionacres bottom line

The fact that landlords are imposing higher credit score requirements could be a good thing for residential real estate. Ultimately, it’s on you individually to come up with a system for vetting tenants from a financial perspective. And that system can include demanding whatever credit score you need to get comfortable.

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