The landlord is faced with finding tenants that will pay on time and be a dependable source of investment income for the landlord. One evaluation tool available to the landlord is the FICO score. The FICO score is a calculation from several sorts of credit criteria based on a persons credit report. In order to determine what is a good FICO credit score is for renting the landlord must first understand the basis of the FICO score. Then a determination can be made as to an appropriate score that would be acceptable for a renter.
Understanding how the FICO score is calculated
The FICO scored is based on information found in a person’s credit reports from the three primary credit reporting bureaus; Equifax, Transunion, and Experian. The FICO score is a scale from 300 to 850 with 300 being the worst and 850 the best. The FICO score takes into account the good, the bad, and the ugly on a credit report. The FICO score is based on five categories and those categories are broken into percentages on how they affect the FICO score. The breakdown is as follows: 35% of the FICO score is based on payment history, 30% is based on amounts owed, 15% is based on length of credit history, 10% is based on new credit, and 10% is based on types of credit used. Obviously the most important factor is whether or not a person pays their bills on time. Fundamentally that is also the landlord’s primary concern when searching for a new tenant. It stands to reason that a person that pays bills on time will have a higher FICO score while a person that is consistently late and slow will have their FICO score suffer as a result. This understanding is key for the landlord seeking to set a limit on the acceptable FICO score from a prospective renter. However, keep in mind that there may be extenuating circumstances that have caused a dip in a potential renter’s FICO score.
Determining a good FICO credit score rating
There is a basic rule of thumb when looking at a FICO score to determine if a potential renter is a good candidate. Based on risk, any score less than 500 is considered the worst risk. In other words, don’t be surprised if they are slow to pay. Scores from 500 – 550 are high risk while 550 to 600 is medium to high risk. The prospects with credit scores from 600 – 650 are deemed medium risk. A score of 650 – 700 is tagged medium to low risk. Scores ranging from 700 – 850 are considered low risk. The landlord should have an idea as to what the minimum FICO could be and still be considered as a tenant. Medium risk scores 550 and above would be a good starting place while requesting explanations for the poor score is always appropriate.
While it is up to the individual landlord, the FICO score is a definite indicator of a person’s ability or willingness to be reliable with their finances. Worst risk and high risk candidates are difficult to endorse. Medium risk scores can give the renter an opportunity to justify their situation and allow them to be tenants. Keep in mind, history many times will repeat itself.