How to Perform a Credit Check on Tenants

Credit Checks for Landlords: A Guide to Tenant Screening

As a landlord, one of the most important steps you can take to protect your rental income and ensure a smooth tenancy is running a credit check on prospective tenants. A credit check provides valuable insights into a tenant’s financial history, helping you assess their ability to pay rent on time and manage their finances responsibly. By including a credit check as part of your tenant screening process, you can reduce the risk of rent arrears and ensure you find trustworthy tenants.

In this guide, we’ll explore what a tenant credit check involves, how landlords can run one, and why it’s an essential part of the tenant vetting process.

What is a Credit Check?

A credit check is a financial background check that assesses an individual’s creditworthiness by reviewing their credit history. This includes information such as past borrowing, credit card usage, outstanding debts, and any instances of missed payments, bankruptcies, or court judgements. For landlords, credit checks help determine if a prospective tenant is likely to meet their rent obligations.

Why Should Landlords Run Credit Checks?

Conducting a credit check on tenants provides several key benefits for landlords:

• Financial Responsibility: A credit check shows whether the tenant has a history of paying their bills on time, including any prior rent payments or loans.
• Reduce Risk of Arrears: By understanding the tenant’s financial habits, landlords can reduce the risk of rent arrears and avoid costly eviction processes.
• Verifying Identity: Credit checks also help confirm the tenant’s identity, ensuring that the details provided during the application process are accurate.
• Protecting Your Property: Financially stable tenants are less likely to default on rent, protecting your investment and avoiding disruption to your cash flow.

How to Run a Credit Check as a Landlord

To perform a credit check on a potential tenant, landlords can follow these steps:

1. Obtain Tenant Permission

Before running a credit check, you must have the tenant’s written consent. This is required under data protection laws, including the General Data Protection Regulation (GDPR) in the UK. You can include a consent form as part of the rental application, ensuring that the tenant is aware of and agrees to the background check.

• Tip: Be transparent about what the credit check will involve and how the information will be used.

2. Choose a Credit Reference Agency

Landlords can use credit reference agencies (CRAs) to perform the check. In the UK, the three main credit reference agencies are:

• Experian
• Equifax
• TransUnion (formerly Callcredit)

These agencies provide detailed credit reports that show the tenant’s credit score, outstanding debts, payment history, and any legal issues like County Court Judgments (CCJs) or bankruptcies.

Many tenant referencing services also offer credit check packages tailored to landlords, simplifying the process. Examples include OpenRent, RentGuard, and HomeLet.

3. Run the Credit Check

Once you’ve chosen a credit reference agency or tenant screening service, submit the tenant’s details (including full name, address history, and date of birth). The agency will then access the tenant’s credit report, and you’ll receive a report highlighting key financial indicators.

• Key Report Information: The credit report will show the tenant’s credit score, payment history, outstanding debts, credit accounts (e.g., loans, mortgages), and any public records like court judgments or insolvencies.

4. Review the Results

When reviewing the credit check results, focus on several key factors:

• Credit Score: A high credit score indicates that the tenant is likely to be financially responsible, while a low score may raise concerns about their ability to pay rent on time.
• Payment History: Look for any missed or late payments on previous rent or loans, as this could indicate potential issues with future rent payments.
• Outstanding Debts: Check for significant debts or maxed-out credit cards, which could suggest financial strain.
• Legal Issues: Be cautious if the tenant has any County Court Judgments (CCJs), bankruptcies, or Individual Voluntary Arrangements (IVAs), as these indicate past financial problems.

5. Consider the Overall Application

A credit check is just one part of the tenant screening process. Combine the credit report with other factors, such as employment verification, references from previous landlords, and the tenant’s income, to make an informed decision.

• Tip: Don’t reject a tenant solely based on a low credit score. Consider their overall financial situation and reasons for any past issues. For example, a tenant with a stable job and income may still be a good candidate despite previous financial difficulties.

Costs of Running a Credit Check

The cost of running a credit check varies depending on the provider. Basic credit checks can range from £10 to £50 per report, depending on the depth of information required and the services offered. Some tenant referencing agencies offer packages that include credit checks alongside employment and landlord reference checks for a comprehensive vetting process.

What to Do if the Credit Check Raises Concerns

If the credit check raises concerns, such as a low credit score or history of missed payments, consider the following options:

• Request a Guarantor: You can ask the tenant to provide a guarantor, usually a family member or friend, who agrees to cover the rent if the tenant fails to pay. The guarantor will also need to pass a credit check.
• Offer a Short-Term Lease: If you’re uncertain about the tenant’s financial situation, you can offer a short-term lease (e.g., six months) to assess their ability to meet rent obligations before committing to a longer agreement.
• Higher Deposit: In some cases, you may request a larger security deposit as a safeguard, though landlords in the UK are limited by the Tenant Fees Act 2019, which caps deposits at five weeks' rent.

Legal Considerations for Landlords

When running credit checks on tenants, landlords must comply with legal regulations, including:

• Data Protection: Ensure you have the tenant’s written consent before accessing their credit report, in compliance with GDPR.
• Tenant Fees Act 2019: Under the UK’s Tenant Fees Act, landlords cannot charge tenants for credit checks or referencing. All costs associated with tenant screening must be borne by the landlord or letting agent.

Failure to follow these rules can result in fines or penalties, so it’s essential to stay informed of your legal obligations.

How Fraser Bond Can Help

At Fraser Bond, we offer comprehensive property management services, including tenant screening and credit checks, to help landlords secure reliable tenants. Here’s how we can assist:

• Tenant Screening: We handle the entire tenant vetting process, including credit checks, employment verification, and reference checks, ensuring you find trustworthy tenants.
• Legal Compliance: We ensure all tenant screening processes comply with UK legal standards, including GDPR and the Tenant Fees Act.
• Property Management: Our property management services extend beyond tenant screening, including rent collection, property maintenance, and ongoing tenant relations.

Conclusion

Running a credit check on potential tenants is a crucial step for landlords looking to protect their rental income and avoid problematic tenancies. By assessing a tenant’s financial history, you can reduce the risk of rent arrears and ensure you’re renting to responsible tenants.

At Fraser Bond, we offer expert advice and tenant screening services to simplify the rental process. Contact us today to learn more about how we can assist with credit checks, tenant vetting, and property management.