Most people think credit and criminal are all that matters . . . The experts at Experian have a little more to say.
Used in conjunction with credit evaluations and traditional screening methods, rental payment history can go a long way toward filling up an apartment community with qualified renters who pay on time.
Resident screening companies love data. To determine whether or not a prospect is worthy of renting an apartment, vast databases are scanned for past purchasing behaviors, job histories, on-time and overdue payments and of course, credit history. Landlords and leasing agents have known it for years: a social security number is the best information an apartment prospect can provide on an application. Check personal references? Maybe. Check credit? Absolutely.
But credit scoring isn’t necessarily the Holy Grail it used to be when determining a resident’s propensity to pay rent on time. Consider the millions of Americans who lost a home due to a foreclosure, or someone who temporarily lost a job in the recession and was unexpectedly hit with medical bills and no health insurance. Particularly in our current economic climate, there are lots of reasons why a rental applicant might have poor credit, limited credit or no credit at all. Furthermore, some of these criteria might have little (if any) impact on whether or not they will pay their rent.
Since apartment operators depend on rents for success and survival, knowing each individual resident is going to pay up on the first of the month is critical to establishing net operating income (NOI) and consistent revenue. From there apartment owners can accurately determine the market value of their real estate, decide when and where to invest in capital improvements and make informed decisions on buying and selling property: all based on rent roll.
With recent swings in the homeownership ratio, more than 1/3 of the U.S. population rents, and what better way to determine creditworthiness of rental applicants than to consider how they have historically paid their rent. Experian RentBureau began incorporating residential rental payment data into credit reports over a year ago, and according to our research, inclusion of positive rental payment history data will pull one in three consumers out of high-risk categories and put them in better qualifying scoring bands.
The easiest way to help residents establish credit is to furnish their payment data. Offering prospects and residents such an easy way to establish and rebuild their credit score—simply by paying their rent on time—is likewise a huge benefit apartment communities can easily market as a turnkey amenity. This is a message surely any rental prospect would love to hear from a leasing agent.
In addition to the resident credit-building benefits of furnishing rental payment history, accessing trend data on payment history has recently emerged as a primary metric employed in screening practices to employ as another layer separating the good renters from the bad. Used in conjunction with credit evaluations and traditional screening methods, rental payment history can go a long way toward filling an apartment community with the highest-quality renters who pay on time. Building a resident demographic of credit-worthy renters thus has an immediate positive effect on NOI, reducing the overall likelihood of skips and decreasing exposure to bad debt and its associated collections costs.
The M.O. is relatively simple: in addition to raw credit, rental payment history looks at how well an applicant has historically paid their rent. A lower credit score matched with a rental history that shows on-time, every time rent payments suddenly becomes a qualified rental candidate—and one who other property managers not utilizing rental payment history might decline.
“Rental payment history has helped us to identify applicants who are more than likely to honor their rental obligations based on their past history of paying their rent timely,” says Michael Johnson, executive vice president and chief administrative officer of ALCO Management. “By using rental payment history as part of your screening criteria, you can make a faster, more consistent decision regarding the application.”
Brannan Johnston is vice president and managing director of Experian RentBureau, the largest and most widely used credit bureau in the multifamily industry. In addition, he oversees the income and asset suite of products within Experian’s Consumer Information Services.