Credit Checks for Landlords

Credit Checks for Landlords

Credit checks for landlords are extremely important and always recommended as a standard procedure.

What is a credit reference check?

A credit check report for landlords checks an individual’s credit history and will give an indication of whether they can afford to take on a new debt. As a landlord you should be carrying out tenant credit checks.

There are three credit reference agencies in the UK – Equifax, Experian and TransUnion. These agencies all collect financial data on individuals, which is then used to compile credit reports. Depending on the type of check made, these reports can detail how much credit someone has used previously and how much they may be able to afford.

How to carry out a credit reference check on tenants

In order to carry out a credit reference check, you will need to use a third party. Financial data is sensitive and therefore only particular companies can access it.

As a member of Eastern Landlords Association, you will have access to credit checks and tenant referencing.

What does a credit reference report show?

The two types of credit check that we provide our members are:

Instant – carried out by Let Alliance, this is a credit check only for the potential tenant.

Price is £20 per applicant.

Comprehensive – also carried out by Let Alliance, this includes the credit check alongside references from any current landlord and employer.

Price is £30 per applicant. If a guarantor credit check is required, the price is £35.

Why should landlords carry out credit checks?

Landlords should carry out credit checks on any prospective tenant. The credit check will show if the tenant pays their bills on time, and if there have been any late or missed payments in recent years. The report will also detail any credit agreement and current debt the tenant may have, in addition to any fraud convictions and CCJs (County Court Judgements). A credit reference report also confirms previous addresses.

All of this information is very useful to a landlord; if a tenant has a history of paying late or not at all, it may mean that you do not wish to offer them tenancy.

Will a tenant know if you’ve carried out a credit reference check?

Before you carry out a credit check, you should gain permission from the tenant. If you carry out a credit check without a tenant’s authorisation, they may know that you have done this and could potentially take legal action against you.

Anyone that has an account with one of the credit reference agencies will be able to tell when a credit reference check has been carried out and are able to track their credit score.

What happens if a tenant fails a credit score?

Many tenants worry about credit checks, even if they have been honest about previous credit issues. There are several reasons why a tenant might fail a credit check, the main one being that the referencing agency has been unable to verify their current address. This is not necessarily a cause for concern, due to a number of factors:

  • The tenant is not responsible for paying bills at their current address.
  • The tenant has not lived at the current address long enough to get onto the electoral roll.
  • They are not named on the tenancy agreement at their current address.

If this happens, you can ask the tenant to either provide a letter from their current landlord, confirming that they are living at the address provided, or ask the tenant to show a letter from their bank confirming this information.

Furthermore, tenants often fail credit checks because their salary is deemed too low to afford the rent. Credit agencies usually expect gross pay to be at least twice the rent (sometimes three times) and will automatically fail anyone that does not reach this.

Letting to tenants with a poor credit score

There are several reasons why a tenant has poor credit. It could be that they had very little credit in the past and therefore have a ‘thin file’, or they may have CCJs which is an indication of having problems making payments in the past.

In the case of a tenant with a ‘thin file’ it may be that they are very good at managing finances and never needed to take on any debt. We would recommend considering each case individually because bad credit is not necessarily a deal breaker. If you are concerned about a tenant’s ability to afford rent, you can ask to see bank statements to understand the money that is coming in and how it is managed, or you could ask for a guarantor. This is common practice for someone who does not have credit information. The guarantor will be expected to pay the rent on behalf of the tenant if they default.

Should you credit check a guarantor?

Quite simply, yes. A guarantor will be responsible for making rental payments if the tenant doesn’t, so you need to carry out the same credit checks for a guarantor as you would a tenant. If the guarantor’s credit check flags up issues such as struggling to make payments, or being overly in debt, you may wish to request that the tenant uses a different guarantor.

If you require any advice regarding credit checks for landlords, our experienced staff can be contacted for advice Monday – Friday 9am to 5pm via phone or email.

If you’d like more information on membership, contact us today.