What’s in a Credit Score?
When evaluating a potential tenant for your property, there are several factors that you will want to consider. Perhaps the most important of these factors is the credit score. To gain a better understanding of why the credit score is important and how it can help you evaluate a potential tenant, however, it is important to gain a better understanding of what is in a credit score and how it is calculated.
How are Credit Scores Calculated?
Credit scores are calculated based upon the following information:
- Payment history
- Amounts owned
- Length of credit history
- Credit mix in use
- New credit
Payment history, which simply looks at whether or not the tenant has paid his accounts on time, is 35 percent of the credit score. Amounts owed, on the other hand, looks at how much the tenant owes on accounts. The amounts owed accounts for 30 percent of the credit score. Therefore, credit history and amounts owed are the two most important aspects of the score, accounting for 65 percent of the overall score.
The length of credit history accounts for 15 percent of the credit score. Generally speaking, a longer credit history increases the overall score within this category. This category considers how long credit accounts have been established, including the age of the oldest account, as well as the age of the newest account and the average age of all accounts. It also considers how long it has been since you have used certain accounts.
The credit mix in use category of the credit score considers the types of accounts the potential client has open, including credit cards, installment loans, retail accounts, mortgage loans and finance company accounts. This category accounts for 10 percent of the score. The final category, new credit, also accounts for 10 percent of the score. This category is negatively affected if several new accounts have been opened in a short period of time, as research shows that this type of behavior represents a greater risk.
What is a Good Credit Score
The most commonly used credit scoring models offer scores ranging from 300 to 850, but there are some slight variations among the major credit scoring models. These are as follows:
- FICO Score range: 300-850
- VantageScore 3.0 range: 300-850
- VantageScore scale (versions 1.0 and 2.0): 501-990
- Experian’s PLUS Score: 330-830
- TransUnion New Account Score 2.0: 300-850
- Equifax Credit Score: 280-850
While lenders set their own standards in determining what constitutes a “good” score, the scores can generally be categorized as follows:
- 300-629: Bad Credit
- 630-689: Fair or Average Credit
- 690-719: Good Credit
- 720 and Up: Excellent Credit
The average credit score in the United States is about 700, while 20 percent of scores fall below 600, 23.2 percent are between 600 and 699 and 56.8 percent are 700 or above.
When it comes to screening potential tenants, you will need to set your own standards in terms of credit score expectations. Clearly, other factors should also be considered, but credit scores serve as a strong guideline to help you narrow down your pool of potential tenants.