Why Traditional Credit Scores Miss The Mark On Renters
Johnny Bravo??
Helping Landlords Combat Fraud | Exposing Fraudster Tactics | Synthetic Fraud & Identity Theft Detection
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In 1989, the FICO score was first introduced.
Initially, it was designed as an alternative to previous methods of underwriting which were time-consuming, susceptible to human error, and prone to prejudice in the evaluation and lending practices of the time.
Now, through the years, traditional credit scores have transformed into the defacto method used by lending institutions for everything from mortgages to auto loans.
And, while they are predictive to some extent across the board, there is a fundamental misunderstanding of how predictive traditional scores are when it comes to renter populations and the outcomes landlords are most interested in.
Specifically:
But before we dive into how traditional scores miss the mark on the renter population, it's important to understand first what a credit score is and isn't.
What Is A Credit Score?
According to the Consumer Financial Protection Bureau (CFPB):
A credit score is a prediction of your credit behavior, such as how likely you are to pay a loan back on time, based on information from your credit reports.
According to Wikipedia:
A credit score is a number that provides a comparative estimate of an individual's creditworthiness based on an analysis of their credit report.
According to Investopedia:
A credit score is a three-digit number that rates your creditworthiness...Lenders use credit scores to evaluate your credit worthiness, or the likelihood that you will repay loans in a timely manner.
Notice what all of these definitions are missing?
Any terminology related to rentals, renters, apartments, property management, landlords, rent, etc.
Traditional credit scores have historically been focused on debt repayment which is fundamentally different from rent.
With debt, the lender is providing the funds upfront, to be repaid, often with additional interest.
The problem though; is that landlords and property managers are not lending the rent money to renters. It's a very different offering.
As it is, the only time rent is considered debt is when a landlord sells the rent owed to a collections agency.
This is one of the fundamental weaknesses of using traditional credit scores when it comes to assessing someone as a good or potentially bad renter.
But of course there are other key differences that cause traditional credit scores to be less than ideal when it comes to assessing the potential of a rental applicant.
Why Traditional Credit Scores Miss The Mark For Renters
Often Missing Rent Payment History: As it stands today, only the latest traditional credit scores include rent payment data. For example, FICO 8 does NOT factor in rent payment history into their score, however newer versions do. Currently, all VantageScore versions do include rent payment history.
No Industry Focus: All the way back to 1989 when the first FICO score was introduced, it was created with the broadest application in mind. Credit cards, mortgages, store cards, personal loans, etc could all use a credit score to assess the likelihood of a consumer paying back their debt in a timely manner. Outside of auto and bankcard specific scores from FICO, traditional scoring models are generally not focused on any one industry.
Not Predicting The Right Outcome: Again, credit scores are meant to predict the likelihood of someone paying back a debt. In reality, traditional credit scores do not care whether it's being used for a credit card application or mortgage. The score returned can be used for either. But that's not what most landlords care about. They want to know whether that resident will pay their rent, or be evicted.
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Less Adaptable To Industry Changes: The rental housing industry has seen significant changes in just the last five years. If we think about the turmoil from COVID, various regulations and legislation from the current administration, as well as changing demographics and migration patterns; traditional credit scores simply can not keep up with rental industry changes along with all the changes in the other industries it serves.
Different Scores Between Companies: Unlike VantageScore which is a culmination of data from all three Credit Bureaus, each bureau has its own FICO score. That means that your FICO score from Experian could be different from your Transunion FICO score; which could be different from your Equifax FICO score. In addition to the potential to be different from your VantageScore, this variance between the three bureaus and the various scores erodes trust when applying the results to tenant screening. There is simply no way to properly assess which of these options would be most ideal for a renter.
Here are the currently available FICO scores.
Outdated Models: When it comes to predictive models, a best practice often used by data and analytics teams is to update said models every 3-5 years. This update would allow for new data to be incorporated, changes in consumer behavior to be factored in, and ensures the most up-to-date modeling techniques are being used. As of today, the latest version of FICO (FICO Score 10T) was released in 2020, and the latest VantageScore (VantageScore 4.0) was released in 2017. Might be time for a refresh.
Rejects Good Renters Due To Lack Of Credit: Traditional models have a hard time scoring thin-file applicants, which means good renters could be rejected often because they are young or just starting to establish credit. According to a Transunion study, new-to-credit consumers "generally perform as well or better than borrowers with established credit and similar risk scores". Traditional scores may mistakingly cause you to miss out on some potentially awesome renters.
Are Credit Scores Still Predictive?
Yes, of course they are. But given the very nature of traditional credit scores, there is a limit to how predictive they can be, especially when it comes to the potential of someone being a good or risky resident.
A Better Option
When it comes to assessing the potential of an applicant, traditional credit scores simply won't cut it.
The great news is that there is a better option.
As far back as 2013, Transunion has been providing a scoring model designed specifically for the renter population, ResidentScore.
This model hits all the key areas that traditional scores simply lack.
?? Includes Rent Payment History
?? Industry Focused
?? Designed to predict the outcomes that matter to landlords
?? Updated and adapted for industry changes
?? A single model for the renter population regardless of asset type
?? Updated regularly to accomodate changes
?? Better able to assess thin-file and unscorable applicants
Johnny, can you help me?
Maybe, let's chat. If you're worried you're missing out on good renters, or letting too many bad ones in, comment below or reach out and let's discuss.
Additional References & Resources
Disclaimer: The opinions and views expressed in this article do not necessarily represent the views of my employer. The information provided is intended for general informational purposes only and may not be suitable for your specific circumstances. The information presented may also be subject to change and may not be up-to-date. Therefore, you should not rely on this information as legal, financial, or professional advice. Please consult with your own legal or financial advisors and abide by all applicable laws, rules, and regulations related to your situation.
Photo by Tomas Martinez
Co-founder & CEO @ Trigo | AI Rent Verifications
7 个月Such a great article and so true! Rent data is largely "invisible" in FICO and that's a huge problem for landlords and property managers!
Versatile Sales Professional | Proud Veteran| Mentor
10 个月Great walkthrough Johnny Bravo??!