It may surprise you to find out consumer credit scores increased throughout the pandemic, a time of record high unemployment and eviction moratoria.
Alexandra Alvarado
Director of Marketing and Education, American Apartment Owners Association
FICO reports that the average credit score now stands at 716, eight points higher than 2020, with consumers in lower score ranges seeing the biggest improvement. How did this happen and more importantly, how does it change how we screen tenants?
Regardless of the credit bureau or score model, these factors affect a credit score: number of missed payments, consumer debt levels, and credit-seeking behavior. Let’s start by looking at how these factors changed during the pandemic.
Missed payments are down
The CARES Act helped keep millions of Americans afloat financially, not only through unemployment and stimulus checks, but also by requiring creditors to work with good paying customers going through hard times without having it reflected on their credit report. Some consumers used stimulus money to pay bills which might have otherwise been missed; others asked their creditors for deferments and payment arrangements if they couldn’t make a payment. Given that payment history makes up 35 percent of a FICO score calculation, it’s no surprise this cooperation played a big role in improving credit scores.
Consumer debt is down
Consumer debt levels also dipped as consumers began spending more conservatively due to reduced income, fewer opportunities to spend during lockdown, and uncertainty. This uncertainty led to historic savings as a percentage of disposable personal income. Rather than taking on new debt, consumers prioritized paying down their debt or deferring it, which in turn improved their credit scores.
Credit inquiries are down
When a consumer applies for a new line of credit, their credit score takes a slight dip for several months. Fewer consumers engaged in credit-seeking behavior, which meant fewer hard credit inquiries and a better score.
Consumers are more educated
All three major credit bureaus started providing free weekly credit reports, an offer that has been extended to April 2022, meaning many consumers became more familiar with their credit report. This access, coupled with news stories and free education about maintaining credit scores during the pandemic, likely influenced consumer behavior.
How does this change tenant screening?
Although a credit report is still important to use in your tenant screening process, to get the most holistic picture of an applicant’s financial stability, you should also look outside of a credit report.
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It may surprise some landlords to know that tax liens and civil judgments (including evictions) have been removed from credit reports since 2017. Even with eviction moratoria lifted in most states, future evictions will not affect a consumer’s credit score unless the landlord or property manager uses a collection agency to report an unpaid court judgment.
In theory, a renter could get evicted, owe taxes, continue to defer their loans under the CARES Act, and their score would remain unaffected.
On top of that, credit reports have never included income or bank account balances, two factors that are crucial in determining if the tenant can afford your rent.
Spending the extra time to verify income in multiple ways, including calling the employer, asking for paycheck stubs, and collecting a W-2, is worth the time and energy. Asking to verify a bank balance also goes a long way. Having enough savings for a rainy day is more important than ever, and having a good credit score doesn’t mean your rental applicant is ready for a catastrophe.
Check with your tenant screening provider to ensure they can supply you with a separate report for tax liens and civil court judgments and that they can verify references and income for you if you have too much on your plate to do it yourself.
The bottom line is your applicants are more than just a credit score. Get the full picture by doing your research and you’ll be in a better position to find a quality tenant who will pay their rent on time.
To learn more, visit: https://www.american-apartment-owners-association.org/
