21
Feb
13

the value of credit checks…..

 

 

imagesWe’re often asked why credit checks are important for renting…aren’t they more important when it comes to buying a house?  The short answer is ‘no’.

First of all, the information on a report can be used to verify, or call into question, some of the information on a tenant’s application.  Current employers, addresses, birth dates, loans, access to credit will show up on the report, and the first thing to do is match it up with the application to see if all is good.  At this point, you might have some additional questions for the applicant.

Secondly, and just as important, a credit report is a great way to gauge the prospective tenants abilities to manage their cash flow, and to see if they have run into issues in the past.  Late payments, non-payments of bills, collections orders (especially from Property Management companies) are never a good thing.  Bankruptcy and proposals may also cause concern.

And finally, it’s good to see that prospective tenants have access to credit, as sometimes the unexpected happens, and the use of credit will still allow the rent to be paid on time!

 

Here are some ways to maintain a good credit rating:

 

1. Know what goes into a good credit score

The more you know about what goes into your credit score, the easier it will be to maintain a good one. Five key pieces of information are used to calculate your credit score – your payment history, level of debt, credit age, mix of credit, and recent credit. But, not everything financial affects your credit score. For example, checking account overdrafts and utility payments won’t automatically help (or hurt) your credit score.

 

2. Pay your bills on time

That goes for all your bills, not just your credit cards and loans. While certain bills don’t get reported to the credit bureaus when you pay on time, they could end up on your credit report if you fall behind. Even a small library fine could wind up on your credit report. Continue to pay all your bills on time to maintain a good credit score.

3. Keep your credit card balances low

The higher your credit card balance is, the worse your credit score will be. Your credit card balance should be within 30% of your credit limit to maintain a good credit score. That’s $300 on a credit card with a $1,000 credit limit. Charging more than 30% of your credit limit is risky even if you plan to pay off the balance when your billing statement comes. Card issuers typically report the balance when your statement closes and if that’s a high balance, your credit score will be affected.

4. Manage your debt

Credit card balances aren’t the only accounts that influence your credit score. Loan balances and lines of credit also impact your level of debt (30% of your credit score). Having too much debt can cost credit score points and make it difficult to afford your monthly payments. The lower your debt, the easier it will be to maintain a good credit score.

5. Don’t close old credit cards

When you close a credit card, your credit card issuer no longer sends updates to the credit bureaus and the credit scoring formula places less weight on inactive accounts. After 10 years or so, the credit bureau will remove that closed account’s history from your credit report. If the account was an old one (which it would be after 10+ years), losing that credit history will shorten your average credit age and cause your credit score to drop.

 

6. Limit your applications for new credit

Each time you apply for credit – whether a credit card or loan – your credit score takes a small hit. Credit inquiries are only 10% of your credit score, but if you have a high credit score (say 800), you stand to lose a lot of points (10% of 800 is 80). Opening a new credit account also lowers your average credit age (15% of your credit score). To maintain a good credit score, you should open new credit sparingly.

7. Watch your credit report

Just because you do everything right with your credit doesn’t mean everyone else will. Errors could end up on your credit report leading to a drop in your credit score. Identity theft and credit card fraud can also lead to inaccurate information on your credit report. Checking your credit report throughout the year lets you detect these mistakes sooner so you can correct them and maintain a good credit score.

 

If you’re interested in further information…the websites of some major credit reporting agencies are great places to start:


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