How Credit Scores Are Calculated
As a property owner or manager, you know how important it is to choose the right tenants for your property. After all, you want tenants who will pay rent on time, take care of your property and ideally stick around for a while—saving you from the difficulties of constantly filling vacant apartments. One of the key factors that many multi-unit managers use when choosing tenants is credit score.
What Are Credit Scores Anyway?
When discussing credit score, normally this refers to the FICO score published by the major credit bureaus. Credit scores are a numerical representation of a person’s creditworthiness. While not 100% perfect, a credit score can offer a good picture of the overall credit picture. According to MyFICO.com, credit scores range from 300 to 850, and a higher score generally represents better credit.
How is Credit Score Calculated?
It is important to remember that there are three major credit bureaus (Equifax, Experian and Transunion). Each of these bureaus uses a slightly different algorithm to come up with the credit score, so the number each provides may be a little different. Additionally, the exact algorithm used is not published. However, information is available showing what details in a person’s credit history is used to calculate a credit score. Consider the following details that are used to make up a credit score (as referenced on Bankrate.com):
- Payment History – Whether or not you make regular, on-time payments has a big impact on your credit score—perhaps up to 35% of your score is based on payment history.
- Amounts Owed – While your income does not influence credit score, the amount you owe, or your debt compared to your available credit does.
- Length of Credit History – Those who have had credit for longer will naturally have higher credit scores.
- Hard Inquires – Hard inquiries or actual “searches” for credit will have an impact on your credit. This has a minimal impact and generally affects it less than other aspects do.
- Miscellaneous – This is the “catch all” category. Anything else that may affect the score fits in this category.
Now that you understand a bit more about how credit score is calculated, you can better utilize credit score information as one of many factors as you search through tenant applications and find the ideal renters for your apartments or other rental units.