What is the Purpose of a credit check?

Consistency is demonstrated by what a prospective tenant does over and over financially. If a credit check reveals that a borrower has on-time payments with several accounts, over several years, then she is consistent. Stability can be determined by a number of factors. The number of years on the job, the number of accounts open, and the payment history all contribute to stability. A potential tenant who can handle her financial obligations and works for the same employer long-term is a financially stable individual. Landlords check credit reports to predict the behavior of the person who will be renting the property.

Landlords can run credit checks to learn more about a prospective tenant’s past rentals. The rental history of a tenant is used to determine a tenant’s behavior in future rental situations. Any landlord who reports a tenant’s payment history to a credit bureau, will show up on a credit check. Landlords can check a credit report to see if any money is owed to a previous landlord. A landlord can use rental history data to see where a tenant has lived and make inquires concerning those rental agreements.

A tenant’s debts have an effect on the tenant’s ability to afford a particular rental. You should be able to pay her rent along with all other financial obligations each month. A landlord runs a credit check to find out how much debt you carry, as excessive debt will hamper your ability to make rent each month. In general, landlord’s don’t want you to spend more than 50 percent of your gross income on rent and bills, but may be flexible in high-cost areas, such as San Francisco, where rents can easily push renters beyond that threshold.

Credit reports contain both open accounts and closed accounts. Open accounts are usually revolving credit — where there is a payment due each month until the whole balance is paid off, like a credit card. Closed accounts may either be paid in full or with a balance still due to the creditor. Credit checks that contain “satisfied accounts” are closed accounts that have been paid in full. Landlords look to see that the potential tenant has more accounts paid on-time than accounts that were not.

Landlords check credit reports to see if there are any bankruptcies. Bankruptcies remain on credit reports for up to 10 years. A bankruptcy record allows a landlord to see all of the accounts and companies included in the prospective tenant’s bankruptcy. A potential tenant with a discharged bankruptcy is usually a better risk than one with a pending bankruptcy. When a bankruptcy is pending, it is possible for a tenant to be relieved of all current financial obligations — including any remaining rental payments due to a landlord. For this reason, landlords check credit reports to be sure that there are no pending bankruptcy actions.