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So you just ordered a credit report on your new tenant or borrower.
Now you’re scratching your head, thinking,
“What the heck am I looking at?!”
When you’re evaluating a new relationship that involves collecting payments – it’s never a bad idea to get the person’s credit report.
At the same time, this information will only be useful to the extent that you understand how to read it.
To the untrained eye, a personal credit report can be a WILDLY confusing document.
Back when I started working in the banking industry, I remember feeling utterly clueless about how to make sense of these things.
On my first several attempts at reading through various credit reports, I needed someone with experience standing over my shoulder, going line-by-line through each piece of information, helping me understand what every word and number meant.
Only after reviewing dozens of these reports did I start to get confident in how to interpret them.
If you’re trying to analyze a credit report (whether it be your own, or someone else you’re planning to work with), my goal is to shorten your learning curve and help you understand what’s going on.
Where to Order a Credit Report?
The one I use is called Cozy, and they have a downright idiot-proof way of requesting reports from tenants and borrowers (something I desperately need).
The best part is, the system actually requires the applicant to pay for the report, so it doesn’t cost me anything to do this VERY necessary piece of homework on the people I’m considering working with.
In the United States, there are three giant credit reporting agencies that collect the financial data used in most credit reports:
The credit reports from Cozy are provided by Experian, and luckily, they’re some of the most user-friendly credit reports I’ve ever seen (and I’ve seen a lot of them in my time).
That being said, I think the average person could still benefit from a little bit of hand-holding, so I put together this little video to walk you through one example.
Note: Some of the links throughout this blog post are affiliate links that will generate a small commission for the REtipster Blog at no additional cost to you. If you feel Cozy will help achieve your goals and you decide to use these links, your support is very much appreciated!
To summarize, here’s a quick rundown of how I assess credit scores…
- 800 – 850 – Excellent! It’s not often that credit scores come in this high. If you see anyone north of 800, it’s a good sign they’ve been doing something right.
- 700 – 800 – Good! When someone’s credit score is in this range, their financial situation isn’t necessarily perfect, but it’s still in very good shape.
- 650 – 700 – Pretty Good. However, there may be a few “dings” against their credit that are worth investigating.
- 600 – 650 – Meh… this applicant probably has some questions to answer (and some convincing to do). Keep a close eye on any red flags that come up in their credit report. Figure out what has caused their score to be less-than-stellar, and why.
- Less than 600 – Poor. There are most likely some significant issues you need to be aware of. Be very careful when you scores in the range.
Keep in mind, these bullet points are how I look at credit scores. If you want to see more of an “official industry standard”, these pie charts from Experian convey another perspective…
Remember, the credit score by itself never tells the whole story. Simply focusing on this 3-digit number doesn’t tell you WHY the credit score is high, low, or average.
If you really want a better understanding of what’s going on with a person’s financial picture, you need to dig into the details to uncover what kinds of financial obligations a person currently has, or has had in the not-too-distant past.
If you get your credit reports from a service like Cozy, the first thing you’ll see is the credit overview.
This boils everything down to a 3-digit number and gives a quick, high-level summary of where this person stands.
In this example, the applicant’s credit score is 744, which means we can be fairly confident that there won’t be any huge, ugly surprises in their credit report. But even so – it’s always worth your while to keep reading further to understand what information lives behind this number.
The next thing you’ll see is the credit used.
In this example, the applicant has already leveraged 47% of their available credit.
Another way of looking at this percentage is,
If this person has the capacity to borrow up to $100, they’ve already obtained $47 of those dollars.
The idea is to simply offer an idea for how much borrowing capacity they still have left, given how much debt they’ve already taken on.
Total Monthly Payments
The next section of the credit report shows the person’s total monthly payments, which is fairly self explanatory.
It details how many dollars are being paid out each month to cover the outstanding debts and obligations they’ve already committed to.
This data will offer some quick insights on two things:
- What types of debts are already outstanding?
- What are the total monthly payments assigned to each type of debt on the list?
If the applicant has any big monthly payments that are weighing them down, those will probably jump out in this section.
Beneath the total monthly payments section, we’ll see the total debt.
Similar to the previous section, this part of the credit report shows us the current outstanding balance(s) of each type of obligation the applicant is obligated to pay.
Remember, this doesn’t tell us anything about the person’s monthly cash flow (i.e. – whether or not they can afford these monthly payments), but it does tell us how much they’d have to pay in order to wipe out ALL of their existing debt right now.
Of course, simply knowing a person’s total monthly payments and total debt doesn’t tell us anything conclusive about how creditworthy they are. It simply tells us what’s working against them so far.
Next on the credit report is the payment history.
This section tells us how many times (if ever) the person has been late on their payments, how many times they’ve missed their monthly payments (on current or past debts owed).
Furthermore, if any payments has ever been completely neglected or ignored, we can see how many times their missed payments have been turned over to collections (including public records, for instance – if they failed to pay their taxes or any other amount owing to a government agency).
In the best case scenario, the credit reports you analyze will look exactly like this example above. If you see the words “All Clear” and/or “None“, you can simply move on to the next section.
On the other hand, if you see that there have been prior issues, you’ll be able to gain even more insight about what might have gone wrong in the following section.
In the account history section, you can see much more detail about every monthly payment they’ve made for the past two years.
If any payments were late or missed within that timeframe, you’ll see when it happened, how late the payments were, and how long it persisted for (note: you can see the expanded details on each loan by clicking the down arrow next to each account).
In this section of the credit report, there are a few different types of accounts you may encounter:
- Installment Accounts: Installment accounts will have a fixed monthly payment, for a set period of time, with a loan balance that goes down steadily each month until the loan is paid in full. These types of loans are usually for real estate loans, student loans, and other fully amortizing loans.
- Revolving Accounts: With these times of loans, the loan balance can go up and down as the funds are withdrawn, repaid, and redrawn again as needed for the duration of the loan agreement. In most cases, these accounts will be in the form of credit cards or home equity lines of credit, with loan balances that fluctuate from month to month. The principal balance on this type of account doesn’t need to be paid down to zero every month, but at a minimum, interest payments are required.
- Closed Accounts: Whether you’re looking at a revolving account or an installment account, you may see the word “Closed” in parenthesis, whenever the loan has been paid off and closed within the timeframe covered in the credit report.
Again, ideally, you’ll see every payment listed as a green circle with a “C” (current) in this section – but if you see anything else, it may prompt you to start putting together a list of questions for the person you’re reviewing (or, if you’re looking at your own credit report, you’ll want to take special note of any surprises you see here, so you can get them resolved with the appropriate creditors).
When you see indications of late or missed payments, it doesn’t necessarily mean the person isn’t creditworthy, but it should at least tip you off that something unusual is going on.
Remember – sometimes there are legitimately good reasons for late or missed payments.
In my days in the banking world, I saw some good, creditworthy people with horrible credit scores. Why? Because sometimes people will withhold payments because of incomplete work, defective products, various payment disputes, and sometimes they aren’t even aware at money is owed in the first place (this happens a lot with small medical bills that get lost, and then sent to their collections agency when they aren’t paid). Reporting errors can happen too – so don’t assume every credit report is telling you the gospel truth. Look at this as one of many research tools.
When you see issues in this section of the report, ask some questions and dig deeper to make sure you understand the full story.
In the inquiries section of the credit report, you’ll see a list of any other financial institutions, lenders, landlords, screening companies (among others) who have run credit checks on this individual. It will also say what date the credit report was pulled and what type of application it was pulled for (e.g. – auto loan, credit card application, rental agreement, etc.).
When a person has several credit inquiries listed in a short time span, it can have a negative impact on their overall credit score. These types of inquiries are referred to has a “hard inquiry” or a “hard pull”, and these typically occur when a mortgage lender or credit card issuer runs a credit check during their underwriting and decision making process (if someone is applying for a loan with more than one lender at the same time, this can obviously take a toll on their credit score).
Hard inquiries will typically be listed like this on a credit report for about two years after the fact.
One nice thing about Cozy is that when a credit report is requested, the applicant has to authorize AND pay for it, which counts as a soft credit inquiry. Soft credit inquiries don’t have a negative impact a person’s credit score (which is one compelling reason to use a service like Cozy, rather than some other alternative that counts as a hard inquiry).
Addresses and Employment
In the addresses and employment sections, we can see some other basic details about where this person has lived and where they’ve been employed.
It’s worth noting – this section of the credit report isn’t necessarily an all-encompassing “employment history”. Rather, it’s a list of information provided by the applicant’s other lenders.
When a person completes a new loan application (e.g. – when applying for a mortgage or line of credit), part of the application typically requires them to fill out their home address and the name and address of their current employer.
These lenders will then report this information from these loan applications, to the credit agencies – and that’s how this information ends up on credit reports.
This list of employers is only refreshed when a person applies for new credit (and even then, it’s not always provided to the credit reporting agencies), so it’s not exactly a definitive list of the applicant’s current and previous employers.
Also keep in mind, while this information is somewhat useful for verifying a person’s addresses and employment situation, this section of the credit report has no impact on a person’s credit score.
The last thing you’ll see in this type of credit report is the score factors. This is a quick rundown list of reasons indicating why the credit score is what it is.
This section may be helpful in deciphering why a person’s credit score seems lower than it should be (e.g. – if they have an excellent payment history, but they’ve had 20+ hard inquiries against them over the past 30 days… you can use your best judgment to decide whether or not the person is a legitimate credit risk).
In many of the credit reports I’ve seen in the past, these brief explanations are usually somewhat cryptic and difficult to draw any real meaning from. If you come across something here that simply doesn’t make sense, you might find this document helpful in offering a deeper explanation of what each code means.
Income Verification (Don’t Forget This!)
A credit report can be an extremely helpful tool as you’re doing your homework on a potential tenant, borrower, employee or otherwise – but it’s also important to recognize – the credit report isn’t everything.
This data is telling you what the person’s personal debts and obligations are (i.e. – the total loan balances and their monthly payments) and what this information has looked like historically.
However, it’s NOT telling you how much income they generate. If you’re trying to determine their personal debt to income (i.e. – how much they pay out for their monthly debts vs. how much income they generate each month) you’ll need more than just the credit report in order to see the full story.
Most lenders and landlords will request some additional information (recent pay stubs and W-2s) on top of the credit report to verify their applicant’s income, because they simply cannot make an educated decision without it.
In the absence of a W-2 from the applicant’s employer, a copy of their most recent tax return will also show their annual income in the previous year – but the W-2 is usually an easier (and smaller) item to produce, which is why most lenders and landlords start with this.
With this information, you should have reasonable assurance of what the applicant earns each month/year from their job (the W-2 will show what the applicant was paid in the most recent fiscal year) and how much they currently make per month (pay stubs will show what the applicant makes each pay period).
It’ also worth noting, while these documents by themselves can offer some pretty solid assurance of an applicant’s employment situation, they still won’t guarantee that the applicant is currently employed (i.e. – in the unlikely event that they just got fired in the past few days, or if they fabricated their W-2 and pay stubs, you would have no way of knowing this simply by referring to these documents).
This is why it’s also a good idea to contact the person’s current employer to request some kind of employment verification as well, and if you’re relying on the applicant’s tax returns, you may even go so far as to verify these documents with the IRS by using Form 4506-T, which will provide you with a transcript of the person’s tax return.
Getting the Full Picture
It’s important to think critically when looking at a credit report.
Whether a person’s credit score is exceptionally high or low, you need to figure out the “why”.
For instance, let’s consider two different types of credit scores…
Applicant A: This person has a credit score of 580.
They lost their job last year and couldn’t pay their student loans (which sabotaged their credit history). However, in the midst of their loss of income, they chose to continue paying their rent. In other words, they prioritized their payments to their landlord over their other obligations (even to the detriment of their credit score).
They recently got a new job and are current on their payments again, but it will take time to fix their credit score.
Applicant B: This person has a credit score of 780.
Their credit score appears to be very good, because they owe money on several loans and they’ve always paid on time. However, they also have $20,000 in credit card debt (yikes!) and no history of making rent payments. Their borrowing capacity is already highly leveraged and we aren’t sure which payments they would prioritize if they lost their job tomorrow.
When you compare both applicants and understand the FULL picture of why their credit scores are high or low (along with other factors like their income, employment situation and the results of their background check), you may start to see how a low credit score doesn’t necessarily mean someone will be a bad tenant, and a high credit score doesn’t necessarily mean their payments will come with a stronger guarantee.
For some more helpful reading on how credit reports work, be sure to check out these articles as well:
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