When we started Castle, we set out to reexamine as many of the property management industry’s standard practices as we could. When something has been done the same way forever, sometimes that’s for a good reason—but other times, it’s just because no one has thought to take a second look.
The ways in which prospective tenants are evaluated is a great example. For decades, checking credit scores has been a standard component of applicant screening in the property management industry.
But as it turns out, credit scores aren’t a fair or accurate way to evaluate applicants. In fact, no evidence exists to indicate that people with good credit scores are any more likely to pay their rent on time. Here’s why.
Rent Payments Don’t Affect Credit Scores
Many people assume that not paying your rent will hurt your credit, but this actually isn’t true. In most cases, rent payments have no impact on your credit score.
One provider, Experian, has started to factor rent payments into their scores, but only if the tenant’s landlord or management company reports their payments to the Experian RentBureau—which most don’t. And those payments are not factored into the official FICO score anyway.
While we’re on the subject, here are a few other kinds of payments that that aren’t factored into your credit score: utilities, cell phone bills, and insurance.
Oh, and the other thing that isn’t factored in? Your income. Making a six-figure salary—or even winning the lottery—will have no impact.
Credit Reports Are Often Inaccurate
Credit reports are often taken as gospel, but in reality, they’re not nearly as accurate as many people think. Common errors include accounts showing up twice, debt from an ex-spouse, and someone else with a similar name showing up on your credit report.
In fact, a recent FTC study found that 25% of consumers had errors on their credit report that might affect their credit scores.
Most People With Bad Credit Have Bad Luck
When you imagine a person with bad credit, you probably imagine someone who wasted money on frivolous expenses, or did a poor job managing their own finances.
But in reality, the single most common reason someone might have bad credit is an unexpected medical expense. In fact, over half of all collections on credit reports are associated with medical bills.
And the second most common reason for bad credit? Divorce. Hardly an indicator of one’s ability to pay either.
The idea of letting the wrong person into your home can be scary, so it’s no wonder that many landlords and property managers turn to whatever resources they can when screening tenants.
But credit scores are an outdated and inaccurate method of judging someone’s ability to pay rent. It’s well past time for the industry to move beyond them.
