As a landlord, it is essential that you run credit checks on applicants before you allow the applicant to sign a lease and move into your property. This person will be paying your income for the next year, so you need to know whether they have a trustworthy credit history.
Not all credit checks are the same, though. You have two goals in checking an applicant’s credit: verifying the credit history of the applicant so that you can protect yourself, and choosing the lease invasive method of checking credit so that you can protect your applicant’s credit score. Many tenants fill out numerous applications before actually signing a lease, particularly in densely-populated areas. This can mean that their credit history is pulled five or ten times in the course of trying to find a place to live. All of those credit checks can negatively impact a person’s credit score if the person performing the credit check doesn’t handle it responsibly. As a courtesy to your applicants and tenants, you should learn more about how to check their credit without damaging it.
Hard Inquiries and Soft Inquiries
There are two types of credit checks – hard inquiries and soft inquiries. A soft inquiry is the type that is performed when a consumer checks his own credit. If you view your own credit through the official government site or a third-party service, this is a soft inquiry. A soft inquiry does not negatively impact your credit score or affect lending decisions. It provides the entity who is doing the check with a snapshot of your credit without giving them all of the details.
The consumer is not the only one who can run a soft inquiry, though. Companies that already conduct business with you, like your mortgage company or credit card company, can also do soft inquiries to check up on you. This is sort of like driving by the rental property to check in, but not actually going inside. Pre-approved credit card offers, employer credit checks, and bank identity verifications are also soft inquiries.
A hard inquiry is a full report of your credit, such as occurs when you apply for a loan or a credit card. Traditionally, tenant screenings are hard inquiries. The applicant must give permission to the entity who is requesting a hard inquiry. The disadvantage of hard inquiries is that multiple hard inquiries in a short period of time can negatively impact the consumer’s credit. Every time a new inquiry is performed, the credit bureau sees it as access to a new loan, which increases the overall amount of debt or risk attributed to the consumer. This is true regardless of whether the application is approved or denied.
Landlords can choose whether to perform a hard or soft inquiry. Traditionally, a rental application requests the Social Security number of the applicant, and a hard inquiry is performed. Sometimes applicants ask to personally provide the landlord with a copy of their credit report so that they can do a soft inquiry and avoid any impact on their credit. This isn’t a good option for the landlord, though, because it gives the tenant the opportunity to alter the report. Instead, landlords can request a soft inquiry through an online service. This option protects both the tenant and the landlord.
For more information on how you can handle tenant applications and credit checks, get in touch with us. McMath Realty provide property management services in Phoenix and all of Maricopa County of Arizona to take care of all of these credit checks details for you.