If you've taken out a loan before, you might have been asked for a loan reference to vouch for your creditworthiness. A credit reference on a rental application is similar in that your landlord wants to make sure that you're not a risk and that you're likely to make your rent on time. For example, he might contact your bank to ask about your loan amount, payment history and length of the financial relationship. Understanding the types of credit references that landlords consider, how they impact the rental decision and how to resolve common issues can help you prepare a stronger rental application.
Credit references are people or businesses that have had a financial relationship with you and can provide details about past or current accounts. Landlords contact them as part of your credit check during the tenant screening process.
Define Reference of Credit
When you fill out a rental application, you'll typically include information about your income, rental history and employment, as well as list references. In addition to naming personal references who can vouch that you would be a responsible and a good potential tenant, you may be asked to list the names and contact details for credit references. These references serve to prove that you have a history of paying your bills on time and won't be a financial risk to the landlord.
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During the screening process, the landlord will contact your credit references to get an overview of your credit history and detect delinquencies such as collections accounts or late payments. This information will help the landlord make such decisions like whether he will charge you a large deposit, require multiple months of rent upfront or rent to you at all. While your landlord might call the reference, it's also possible he'll request a credit letter reference instead.
Credit Reference Types
A credit reference can be anyone who has given you credit or otherwise had a financial relationship with you. Examples might include your credit card company, local bank, investment firm, previous landlord or a local business that gave you a payment plan. Wallet Hub also suggests that documentation showing your assets, like cash in the bank, could be a potential credit reference as well.
If you've borrowed money from a friend or acquaintance, you may be tempted to use the person as a credit reference, especially if you set up a formal agreement. But since this loan would likely not show up on your credit report, keep in mind that landlords prefer documented credit information and may not weigh the personal loan the same as a traditional bank loan. If you do lack a credit history, though, you might consider this option rather than listing no credit reference at all.
While you likely won't list the credit reporting agencies — Experian®, TransUnion® and Equifax® — on your rental application, landlords often do also look at your credit report since it serves as a credit reference. Your credit report lists your open and closed accounts with details such as the number of payments made on time or late, the contact details for creditors, bankruptcy filings and any accounts sent to a collections agency.
Impact on Your Rental Application
Having no credit history, limited references or a bad credit history can all have a negative impact on your rental application. The landlord might not feel comfortable renting to someone who doesn't have evidence backing up that she can pay rent regularly. Ultimately, this might result in a denied application or a request to pay a larger deposit than you would if you had a solid credit history.
Another possibility would be the landlord suggesting that you find a co-signer to be able to rent. Often a friend or family member, a co-signer agrees to be on the hook if you don't pay your rent. Since your payment issues can hurt the co-signer's credit score and cause personal tensions, carefully consider whether this option is right for you.
Handling Credit Issues for Rentals
If your credit issues prevent you from getting an apartment, there are some steps you can take to prepare for a better financial future.
Tenants Union suggests that you stay on top of your credit report, which you can obtain for free through a site like AnnualCreditReport.com. If you notice anything seems off with your accounts, file a dispute with the credit reporting agency to prevent that error from affecting future credit decisions. If you're behind on bills or have delinquencies, pay them off as soon as possible. You can also see and track your credit score free through Credit Karma and Credit Sesame.
When lack of credit is the issue and you want to avoid a co-signer, consider getting a credit card and using it responsibly. Another option might include having a strong personal character letter from someone like your employer who can demonstrate that you're trustworthy with finances.