Understanding Credit Scores and Their Impact on Renting

Finding a new place to call home is an exciting process, but it can also be stressful. Especially if you have bad credit. As a renter with less-than-perfect credit, you may feel like you're at a disadvantage when it comes to securing a new apartment. But don't worry, there are options available to you. Before we get to that, let’s start by looking at what impact your credit score has on the rental process.

How landlords and property managers use credit checks to assess potential tenants

Most landlords require potential tenants to fill out a rental application that includes personal and financial information. As part of this process, landlords may run a credit check to determine the applicant's credit score and payment history. Unfortunately, the results of this credit check can have a significant impact on their decision of whom to rent the property to.

Here’s what they usually look at on a potential tenant’s credit report to assess their creditworthiness:

1. Payment history: Landlords evaluate the potential tenant’s credit report for a record of on-time payments, missed payments, or delinquencies. Consistent on-time payments suggest that the tenant is responsible and reliable, while missed or late payments are considered a red flag.

2. Outstanding debts: A look at the total amount of outstanding debt on a tenant's credit report, including credit card balances, student loans, and other debts, is important for landlords to determine the tenant’s creditworthiness. High levels of debt could indicate that the tenant may struggle to make rent payments.

3. Credit utilization: Landlords may also look at a tenant's credit utilization ratio, which is the percentage of available credit they are using. A high credit utilization ratio could indicate that the tenant is overextended and may struggle to make rent payments.

4. Bankruptcies and foreclosures: Any bankruptcies, foreclosures, or collections on a tenant's credit report are indicators of financial instability—something the landlord wants to be aware of before renting to the tenant.

5. Credit score: Credit score is a numerical representation of the tenant’s creditworthiness. A higher credit score generally indicates that the tenant is responsible and reliable, while a lower credit score may indicate a higher risk of missed payments or default. According to Equifax, one of the major credit bureaus in Canada, credit scores from 660 to 900 are generally considered good, very good, or excellent—falling into any of these categories is a good sign according to landlords.

Why do landlords and property managers perform credit checks?

As a landlord or a property manager, it’s their job to ascertain that the tenant they rent their property to pays the rent on time. Performing a credit check is a way to ensure the tenant has no previous history of defaulting on their credit payments, therefore being a strong indicator of the tenant’s credit-responsible behavior—and their ability to pay the rent on time.

Now you might be wondering, if your credit score is lower than the expectations of your future landlord, does that mean you won’t be able to rent a home at all? Absolutely not. Credit checks by the landlord are subjective—meaning there is no standardized benchmark to determine your eligibility for renting. What’s a “bad” credit score for one landlord might be perfectly acceptable for another. The key is to not get discouraged and keep looking.

Tips for Renting with Bad Credit

We all know that life doesn't always go according to plan, and sometimes, our credit scores can take a hit as a result. If you're in the market for a new rental but have bad credit, it can be disheartening to think that your credit history could prevent you from finding a place to live. However, there are steps you can take to increase your chances of securing a lease and overcoming the obstacle of bad credit. Here are a few things you can do:

1. Offer to pay a higher security deposit
   Landlords may be more willing to rent to tenants with bad credit if they can offer a higher security deposit. This shows that you are serious about being a responsible tenant and can help alleviate any concerns the landlord may have. It also reduces the perception of risk from the landlord’s perspective, making them more likely to overlook your bad credit.

2. Get a co-signer or guarantor to sign the lease with you
   Getting someone with a good credit standing to co-sign the lease with you gives potential landlords more confidence because the co-signer is legally responsible for paying the rent if you are unable to do so. It gives potential landlords confidence that they’re covering their bases in case things go south and they won’t lose any money.

3. Search for options that don’t need a credit check
   One of the most straight-forward ways of securing a rental with bad credit is to look for options that don’t require a credit check. If you want to rent with a professional landlord or through a renowned agency/website, it’s pretty impossible to skip a credit check. So contacting private landlords looking to rent their properties might be your best bet. There are often listings on websites like Kijiji and Craigslist that specify no credit check in their listings. However, when approaching a private landlord, you need to be cautious and thorough in your research as there is no shortage of rental frauds and scams in Canada.

4. Provide references and proof of previous rent payments
   Providing strong references from your previous landlords and proof of timely rent payments could help strengthen your application and give potential landlords confidence about your ability to be a responsible tenant, despite a bad credit score.

5. Share details about your financial situation
   Providing proof of a stable income with documents such as pay stubs and an employment contract, along with details about your savings and debt-to-income ratio, helps elicit confidence in the minds of potential landlords to pay your rent on time.

In addition to all these, it’s generally a good idea to know your credit rating before you go to look at the property—this will help ensure you’re not wasting time looking at properties that are beyond your reach based on the listing requirement.

Improving Your Credit Score for Future Rentals

Improving your financial health and your credit score can feel like an uphill battle, and it can be tough to know where to start. You might feel like you're in a never-ending cycle of debt, or worry that you'll never be able to save for the future. The truth is, everyone's financial journey is unique, and there are no one-size-fits-all solutions to improve your credit score. However, with a bit of planning and restraint, you can start taking steps towards a healthier financial future and improving your credit score:

1. Timely bill payments
   Late payments have a significant impact on your credit score. Paying your bills on time each month ensures you avoid late payment fees and negative marks on your credit report.

2. Keeping the oldest credit accounts active
   The length of your credit history affects your credit score, so closing old credit accounts can reduce the length of your credit history. Keep old accounts open (and active) to maintain a longer credit history—and improve your credit score.

3. Consider credit-building products like KOHO
   Credit building products can help individuals with little or bad credit history establish a positive payment report and improve their credit score over time. KOHO, for example, provides you with an affordable way to build your credit by opening a line of credit for you. You decide how much money you set aside from your line of credit. Each month, KOHO reports that amount as an on-time payment to Equifax, thus helping establish a positive payment history for you.

4. Keeping your credit utilization to 30% or less
   High credit card balances can negatively impact your credit score. Try to keep your credit card balances below 30% of your credit limit to help improve your credit utilization ratio. If you do end up exceeding 30%, try to pay down your credit card balance before you get the bill so that your overall credit utilization stays under that range.

5. Avoid applying for too much credit at once
   Applying for multiple credit cards or loans in a short period of time can lower your credit score. Try to space out your credit applications to avoid too many hard inquiries on your credit report.

Renting a new place should be an exciting new chapter in your life, but when you have bad credit, it can be challenging to navigate the rental process. It's important to remember that you're not alone—there are many people in the same boat as you. With a bit of research, preparation, and determination, you can find a rental property that meets your needs and budget. Don't let your credit score hold you back…focus on the positive steps you can take to improve your financial health and move towards a brighter future.