By Robert L. Cain, Copyright 2020
Just one more step. But overlooked trip hazards endanger that step. Trip hazards are things you would avoid if you saw them, but you don’t because you aren’t paying close enough attention. Trip on one, fall on your face, and who appeared to be the “best” applicant could prove to be the worst. Everything checks out, the applicant meets all your criteria; you pull a credit report. But when you read the credit report, what trip hazards are you missing? Sure you want to find out if he or she pays bills on time, has judgments, is in collection, and those are important and can indicate how responsible that person is. But some items on a credit report often get overlooked. And those can tell as much as or more than the payment history and judgment history and might be oft-overlooked tip hazards.
Let’s look at them.
The top entry on a credit report is the name or names of the consumer. If you see multiple names, check carefully. Of course, they could be a married name and a maiden name, so that’s no problem. But what if you see completely different names? That requires investigation. It could mean identity theft, but whose, your applicant’s thievery or the actual person whom the credit report belongs to?
Reported addresses come second. Two things to check here. Do they match up with those on the application? Do addresses appear on the credit report that the applicant didn’t list? Does one address overlap in time with another address? If that’s the case, it could again be identity theft, but whose? If there’s no issue with identity theft, did the applicant report all the addresses on his or her application or is one left out? The one left out will be of particular interest and will require an acceptable explanation from your applicant. Was it a simple error or was he or she trying to hide something? Regardless, investigate further.
Carefully examine employment records. Those consist of the names of current and previous employers and the dates of employment. Do all of those match what’s on the application? Especially missing dates because if a time period is unaccounted for, that requires considerable explaining. What was your applicant doing during that unaccounted for time period? We can speculate, but only further investigation answers the question.
Public records tell a story as well. Those include data from court records and run up red flags. Look for bankruptcies. They stay on a credit report from seven to 10 years from the filing date, depending on the type of bankruptcy. A Chapter 7 bankruptcy stays for 10 years while a Chapter 13 disappears after seven years. A Chapter 13 bankruptcy is a payment plan, and a Chapter 7 wipes out all debts (except student loans, of course). Your applicant could still be paying on a Chapter 13 bankruptcy after seven years and that could affect his or her ability to stay current with other debts.
A bankruptcy might not automatically disqualify your applicant if it was a prompted by medical bills. One study in 2009 conducted by David Himmelstein found that 62.1 percent of bankruptcies were the result of medical bills. Having gotten out from under the medical bills, he or she can have restored credit worthiness.
We don’t see other court records on credit reports anymore since the credit reporting agencies removed them in 2017. So if you’re so inclined, you’ll have to obtain those directly from the county court records. But the rest of the information on the credit report will likely tell you enough.
You probably looked at collections first. Those can be telling about how well a person pays his or her bills but check the dates. If some of the collections come from medical bills, that is an important consideration just as the “medical” bankruptcy is. Unpaid collections may just sit there waiting for the collection agency to take action. Then all of a sudden your new tenant gets wages garnished and will be short on money for rent and car payments. Some collections will have been discharged so the person no longer owes them and they won’t affect the ability to pay other bills.
Now figure out the Credit Utilization Ratio (CUR)—reported use of revolving accounts, credit cards, usually. That tells how much of a person’s available credit is in use. For example, suppose someone has a Visa card with a $2500 limit and currently owes $1200 on it. That’s a CUR of 48 percent. Do that with all revolving accounts to see how much your applicant has to dish out every month for credit cards. Now add in the installment accounts, such things as student loans and car payments, bills where they borrow a specific amount and make monthly payments. Lenders recommend keeping CUR under 25 percent, and rental owners want there to be money left over from all debts to pay the rent.
Finally, look at credit inquiries. There are two types, hard (regular) and soft (account review). The “hard” inquiries are for companies the applicant wants to get credit from. Those can turn into bills. It’s worth asking your applicant about them. “Are you planning to buy a new car?” “Did you apply for a new credit card?” “Where else have you applied to rent? Did they turn you down? Why?”
Each of these trip hazards can negatively affect your business if you fail to pay attention to and account for them. There may be adequate or even acceptable reasons for each of these items, but there also may not be. Just pay attention and keep from tripping.