Why I disagree with rent being added to tenants’ credit ratings.

Cartref Properties rents to people from many walks of life. In today’s market we often rent to newcomers to Canada and many young people. These demographics are often what the rental market consists of. 

One of the common phrases we hear from both of these groups is they have good credit and they have bought a car to develop their credit rating. I often apologise to them and say we are deceiving them in this manner. Let’s look at why we don’t think adding the rent to credit ratings will help tenants improve their ability to rent a property. 

Today’s society has been convinced that we need a good credit score to obtain what we want in the world. A credit score is obtained by borrowing money and paying it back in a timely manner. What seems to be missed by many is the part they must “borrow money” to develop a credit rating. Borrowed money always includes interest which is an additional cost to the consumer. The perons who benefits the most from a person borrowing money is the lender. 

How will adding the tenant rent to the credit rating system help tenants be approved to rent properties. If their previous rent payments are reported on their credit rating it will give landlords the opportunity to view their rent payments. This would be a benefit, only if the tenants pay their rent on time. 

Currently the credit reports provide a number of other items on a report that provide insight to the person’s ability to pay their bills, including credit cards, car and personal loans, phone bills and many more.

How could it not help a tenant. If the applicant is not making payments on these items but is paying their rent on time, it may not be a benefit to their ability to be approved for renting. 

I understand the argument is that some people don’t have loans, credit cards or cell phones for their credit rating. If they don’t qualify for these items they may not be a quality tenant. This leads to the issue with why rent on their credit report would not help. If they are not able to qualify for a loan or a credit card it means the financial institutions are not prepared to lend them money. This is what the credit report is all about, borrowed money. 

Let’s look at why rent on the credit report is not needed. First we need to look at the purpose of a credit report in the process of renting. A credit report often is looked at by landlords with too much weight of how good a tenant is when trying to rent. A credit report offers insight into the person's ability to manage their money, or does it.   

Let’s look at two potential applicants scenraions and decisde who would be a better fit. 

Two couples both working, earning good incomes with rent equalling 30% of their income. 

Couple A has a car loan each, two credit cards each, with balances owing on all of the cards. Each card has a 10K limit, two are maxed out and the other 2 have 3k balances on them. They supply a bank statement showing their account and their rent payment each month though the account each month goes into a short negative balance each month to make these payments. The credit report shows all the payments are being made each month on time and they have 100K in credit and 85% of it is being used. They have a good credit score.

Couple B has the same income level and ratio of rent to income. This couple has no car loans, one credit card each with limits of 10K each and no balances on them. They supply a bank statement that shows the rent being paid each month and the account has a balance of 80K at the end of the month. The credit report shows they have the same credit available of 100K and only 5% is being used. The credit report shows they have no payments but when payments are made they are paid on time. They have a good credit rating.   

If you are a landlord, which one of the above would you prefer as a tenant? 

Everyday we would choose couple B as the above information shows us they are better at managing their money, and they are prepared when something goes sideways. For couple A when one loses employment or can’t work for other reasons, they will struggle to make their payments and rent, may be one of those payments they stop paying regularly. For couple B if one loses their job or they can’t work they have money in the bank to pay their bills during negative situations.     

If couple A had the same scenario above and one of the payments on their credit report was their rent payment, it would not change the situation of their ability to pay the rent. Even if a potential applicant didn’t have the car loans and credit cards but have no money in the bank it shows a low ability to manage their money. 

The tenant selection process involves many things and the credit report is only a part of the process. 

Need help managing your investment properties. Cartref Properties can assist you, call today to discuss your needs. You can find more information about us at: www.cartrefproperties.com