If You're a Renter, Your Credit Rating May Be More Important Than Ever

Thought credit score was only important if you're looking to buy? Think again. Due to pandemic rent freezes and income loss, landlords are more likely than ever to examine renter's credit histories.

During phase one of the pandemic, under the CARES Act (Coronavirus Aid, Relief, and Economic Security), homeowners received mortgage relief in the form of a foreclosure moratorium or a forbearance, and renters in properties that received funds from federal programs received relief as well.

In addition, the Centers for Disease Control and Prevention (CDC) issued an eviction moratorium order preventing the eviction of any tenants who could not make payments. This eviction order ended on August 26, 2021, and the Eviction Lab website, which tracks evictions in six states and 31 cities, found sharp increases in eviction rates. In September, 2021, over 510,000 households received emergency rental assistance from state and local governments, according to data from the Department of the Treasury.

But the pandemic has changed the rental landscape in other ways as well. The Joint Center for Housing Studies at Harvard University issued an August 2021 report that found the following:

  • The share of landlords collecting 90 percent or more of yearly rent fell 30 percent from 2019 to 2020.
  • 10 percent of landlords collected less than half of their yearly rent in 2020, and smaller landlords with one to five units were most likely to have tenants deeply behind on rental payments.
  • The share of landlords deferring maintenance increased from 5 percent to 31 percent from 2019 to 2020, and the share of landlords listing their properties for sale increased from 3 percent to 13 percent.

And those stats are likely to change how landlords view future tenants. Landlords couldn't evict people for not paying rent during the pandemic, and most of them may never recoup the money that they lost. Keep in mind that most landlords don't own their properties outright; instead, they pay mortgages, which meant either tapping into their savings mid-pandemic (if they had any) or being at the mercy of their banks.

Going forward, landlords are much more likely to rigorously assess a potential tenant's ability to make consistent, timely payments. A good way to determine that? Looking at the applicant's credit history.

Why credit history matters for renters, not just prospective buyers

"Credit history is important, since it indicates a potential tenant's ability to manage their finances successfully," says Gary Zaremba, broker/owner at PepZee Realty in Dayton, Ohio, which provides rental spaces, property management, and homes for sale. "A good credit score usually means someone pays their bills on time and is not overextended financially—so they will be able to pay their rent to us without any issues as well."

His view is shared by Jonas Bordo, the CEO and co-founder of Dwellsy, a rental listing service. "Landlords who got burned by renters unable to pay rent during the pandemic are likely to look for the lowest-risk renters they can find going forward," Bordo explains.

Bordo admits that there's no perfect way for landlords to evaluate a prospective renter's ability to pay, but says that credit checks are one tool that is broadly used. So, why aren't credit checks the single tool that landlords use?

"Rent and evictions are generally not reported to credit agencies, so they actually don't have much data on a renter's likelihood to pay rent, which can be very different from other bills," Bordo says. "Plus, in most cases, the landlord can't even see the actual credit report; they're just looking at a summary score."

There are services that tenants can enroll in (for example, RentPlus, Rental Karma, Rent Reporters) and for a monthly fee of $7 to $10, their rent payments will be reported to the credit bureaus. Potential tenants with low credit scores might consider this extra $84 to $120 per year worthwhile to show a history of timely payments to a new landlord.

Other tools landlords can use to determine a tenant's financial reliability

In addition to a potential tenant's credit history, there are other avenues that landlords can pursue. Bordo recommends eviction reporting.

"There are national databases that track court filings of evictions, and a renter should try to avoid a formal, court-ordered eviction if at all possible," he says. In addition, he says landlords can request a reference from a past landlord. "This is a great way to put a new landlord at ease, so consider asking for a letter describing your residency from your current landlord before you leave," Bordo advises.

Zaremba agrees that there are other factors that landlords may consider. Given the upheaval caused by the pandemic, he says landlords may actually be more understanding regarding an applicant's credit history. "We also look at a potential tenant's eviction history, and we run a criminal background check," Zaremba explains, adding the caveat that a string of recent evictions would certainly disqualify an applicant regardless of their credit score.

"Employment history is also an important factor in weighing a tenant application, but we're even more lenient with that, realizing that people were laid-off during the pandemic," Zaremba continues.

However, he adds that his company will primarily consider how stable a potential tenant's financial life is today—compared to mid-2020-lockdown. "That matters more than what their lives might have looked like several years ago," he concludes.

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