Having a better understanding of what can affect someone’s credit score will help you find the right tenant - these 3 factors are very important when making a decision.
1. A small # of “credit accounts” & their history length
When understanding what can affect someone’s credit score you must understand what a small amount of credit accounts and a short history of those accounts means.
If an applicant has one or few accounts open and they have only been open for a short period of time, could result in a mid-level or low credit score. Even if this person has been making payments on time, they could still have a low score because there has not been enough time or data to raise their score.
In this case, there is uncertainty in this person continuing to be a good applicant.
2. Missed Payments
If an applicant has missed payments on their credit report, this should raise a red flag. In this case, the applicant may not have the financial responsibility it takes to make monthly payments on time. There are other factors to consider in this case and should be examined properly.
However, in most cases of short credit report history and multiple missed payment reports the applicant is typically not suitable.
3. Young Credit Scores
Young applicants applying for their first lease are sure to come your way, especially if you are near a college town. Young applicants may have low credit scores or do not have a credit score at all because they haven’t had the time to build it.
There are many ways to further screen these applicants.
You could require a co-signer on the lease and screen this person as well. Another option would be to charge a larger deposit in order to provide security.
Overall, keep in mind that just because they don’t have a credit score does not mean that they would not be good tenants.
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Like you said, I could see that in university towns and the like, that 90% of tenant applications would be from kids with no credit history.
Is this a risk that property owners talk about a lot? What's the general consensus around accepting a tenant with no history?
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It's definitely risk that ALL landlords should be concerned about - typically, we've found that newer landlords/property owners ready to pick up their first rental property are much more likely to take a risk like this - simply due to lack of experience, or that they haven't had a bad experience yet, and are willing to give someone a chance.
Seasoned property owners are typically more hesitant to accept this as they've been in the game long enough to know that it definitely increases their risk - and of course, risk aversion is a huge focus when building long-term investment properties and a sustainable business model.
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