Credit Scores on the Decline: What Property Owners Need to Know

Have you thought about relaxing your credit standards while screening tenants? 

It’s understandable. You may have noticed that the applications coming in are not quite at the level you’d like to see. Inflation, debt, and financial struggle are real for a lot of people, and the tenants trying to rent your home are not immune to those challenges. 

So with credit scores on the decline, what do you need to do in order to protect your property and your profitability without turning away otherwise qualified tenants?

We’re here to talk about it. 

Why Are Credit Scores Declining?

Economic challenges such as inflation, rising interest rates, and increased household debt have contributed to the downward trend in credit scores. These factors mean that even financially responsible individuals might find it harder to maintain high credit scores as they juggle mounting financial obligations. For homeowners and existing tenants, it’s a minor inconvenience. For tenants who are looking for a new rental home, they’re likely going to be nervous about your credit check and unsure of whether they’ll meet your qualifying rental criteria.

But what does this mean for landlords? Good credit is an important metric when you’re evaluating applications. But, relying solely on credit scores might cause you to miss out on potentially excellent tenants who are creditworthy in ways that a credit score alone doesn’t reflect.

The Impact on Tenant Screening

A decline in credit scores doesn’t necessarily mean that renting to someone with a lower number is inherently risky. 

However, it does mean that rental property owners need to tweak their strategies to make smart, informed decisions. Sticking rigidly to a high-credit-score threshold might leave you with more vacancies, longer periods without rental income, and fewer qualified applicants. 

We’re not suggesting you stop screening for credit. We are, however, recommending that you put extra weight on income and rental history when you are screening tenants so you aren’t limiting yourself to a smaller-than-average tenant pool.

Key Factors to Consider When Screening Tenants

To effectively adapt to this changing environment, landlords would be wise to adopt a more holistic tenant screening approach. Here are some additional factors to consider:

1. Employment and Income Stability

A strong and consistent rental history, coupled with steady employment or regular income, may be a better indicator of the ability to pay rent than a credit score alone. Verify that your applicant earns enough income to cover their rent and other expenses (typically, a monthly income that’s 3x the rent is a good benchmark).

2. Rental History

You should be curious about how a tenant has performed in the past. An applicant’s rental history holds invaluable clues to their reliability as a tenant. Did they pay their rent on time? Did previous landlords encounter any issues? A reference check can provide these insights. Ask for landlord references.

3. Debt-to-Income Ratio

Credit scores don’t show the full financial picture. Reviewing an applicant’s debt-to-income (DTI) ratio can give you a better idea of their ability to manage monthly obligations, including rent. You can also use their full credit report to determine whether they prioritize their housing payments. 

4. Background Checks

A proper screening process should go beyond just finances. Conducting a thorough background check can reveal an applicant’s eviction history, bankruptcy, or other red flags that could be risks to your property.

Welcome Open Communication

Sometimes, context matters. Giving a prospective tenant the chance to explain their financial situation can go a long way. Perhaps their credit score dropped because they paid off significant medical bills or incurred a temporary loss of income—and now they’re back on track. Open communication demonstrates flexibility while still maintaining due diligence.

Keeping Your Screening Process Consistent

Whether you decide to reduce the credit score requirement you’re currently including in your rental criteria or prioritizing other parts of the screening report, it’s always important to ensure that your screening process is objective, consistent, and fair. You cannot require a 650 credit score for applicants and then approve someone with a 600 score. All the other people you reject because of the credit score would have a valid fair housing complaint. 

This can be risky. Feel free to adjust your screening criteria, but make sure it’s applied uniformly to every applicant. 

Working with Professional Property Managers to Screen Tenants 

Why risk a screening process that feels frantic because of credit scores and potential fair housing mistakes? 

There’s no need for landlords to manage this more comprehensive tenant screening process on their own. We screen tenants every day for rental property owners, and we can make sure that well-qualified tenants are placed in your property, even as credit scores begin to drop on average. 

We use advanced software and tech tools that can streamline and enhance our ability to assess applicants. This leads to faster decision making, which expedites the application process without sacrificing the quality of our assessment. 

It’s important to have confidence in your tenant choices. A property manager who understands screening can provide the peace of mind you need as well as a highly qualified tenant who can be trusted to pay rent on time and take care of your property.

Set Yourself Up as a Savvy Landlord

Adjusting your strategy based on the evolving tenant landscape demonstrates adaptability and professionalism. It also shows tenants that you’re a proactive investor who values tenants as individuals, not just numbers in a credit report.

By remaining informed, using modern tenant screening tools, and maintaining open communication, you can successfully secure reliable tenants while protecting your bottom line.

Real estate is as much about managing risks as it is about maximizing returns. The steps you take now to improve your tenant screening process will help minimize long-term headaches and protect your investments.

Questions about tenant screening and credit? Please contact us at Bayside Management. We lease, manage, and maintain investment properties in San Mateo and around the Peninsula, including San Carlos, Redwood City, Pacifica, San Bruno, Half Moon Bay, Daly City, Mountain View, Foster City, and Palo Alto.