Apr 1, 2021

A Guide to Credit Reference Checks for Landlords

A credit reference check is where an individual’s credit history is checked. This usually gives an indication of whether the individual can afford to take on new debts. If you’ve ever applied for a loan, a contract phone or a mortgage, chances are you’ll have had credit reference checks carried out on you. If you’re a landlord though, you should also be carrying out these checks on your tenants.

In this post we’re going to explain how and why you should be carrying out credit reference checks. You’ll also learn how much they cost, what to do when a tenant fails a credit reference check, and anything else you need to know to be able to carry out this all important check.

What is a Credit Reference Check?

In the UK there are three credit reference agencies – Experian, TransUnion (Previously CallCredit) and Equifax. These agencies collect data on each person, especially financial data. This information is used to compile a credit report, which details how someone has used credit in the past and how much debt they might reasonably be able to afford. The report can also reveal whether someone has any CCJ’s or any fraud convictions.

Credit reference checks are usually requested by banks and other financial institutions ahead of giving a loan or credit card. This practice makes sure that the banks are lending responsibly and that the person borrowing the money can afford re-payments. Credit reference checks might also be requested by utility companies and any other company that expects regular payments. This is to make sure that the person in question has traditionally paid their bills on time and that they can afford to do so.

How is a Credit Reference Check Performed?

The data held on file by the credit reference agencies is used to assign each person a score that reflects how much of a risk it is to lend money to the person in question. This is known as a credit score. The score is based on how much credit the person currently has, whether they’ve made re-payments on time in the past etc. Each credit reference agency has its own scoring system, so the credit score might look different depending on who generated it, but it should all be based on the same (or similar) data.

What Does a Credit Reference Check Show?

A credit reference check shows a lot of financial information, but the actual data that you can obtain when carrying out a credit reference check will depend on what kind of check you carry out. A soft credit search will show less information than a full credit check or a hard search. A full credit reference search will show:

Name and date of birth
Address and previous addresses
Current account details and overdraft
Any credit taken out
Whether the person is on the electoral register
Financial links to other people
Fraud convictions
If the person has been a victim of identity theft
Public records – like CCJs

Can you Look at Your own Credit Report?

While not necessarily related to how and why landlords should conduct credit reference checks, it’s a question you’re sure to ask. Usually, when discussing credit reference reports and the data they hold people want to look at their own and make sure they are correct. You can indeed look at your own credit report and you are encouraged to do so. This allows you to check that the data held on file for you is correct, highlights any issues you might have getting credit, shows you if there have been any credit checks on you etc. If you’re unlucky enough to be a victim of identity theft your credit report is one of the first places you’d notice it.

Some of the credit reference agencies will charge you to look at your report and some have a paid for subscription service, but it isn’t necessary to pay. Credit Karma have a free consumer service and Experian and Equifax offer a 30-day free trial, but you have to pay afterwards. The Credit Karma report is updated monthly and they pride themselves on being free forever. Once you’ve signed up, you’ll receive an email each month reminding you to check the latest updated information. Unless there’s some reason you need the report to be updated more frequently or there are some features on the subscription services you really need, the monthly free report will be enough to keep your eye on things. Just to clarify, you can only use these kinds of services to look at your own credit information, you’ll need to use a different method to conduct tenant reference checks.

Why Should Landlords Carry out Credit Reference Checks?

Landlords should conduct credit reference checks on any prospective tenant. This will show you if the tenant pays their bills on time each month and will detail any late or missed payments over the last few years. It will verify whether the tenant has any debt and how much that debt is. If the tenant has any CCJs or fraud convictions you’ll spot this in the report, and it will also verify their previous addresses.

All of this data is useful for a landlord. If the tenant has a history of paying bills late or not at all then you might not want to offer them a tenancy. If the tenant has given you their address history and it differs from the credit report, it’s wise to find out why.

How to Conduct a Credit Reference Check on Your Tenants.

To conduct a credit reference check you will need to use a third party. Because the data is sensitive only certain companies can request access to it. The data is protected under the Fair Credit Reporting Act (FCRA). Banks and financial institutions are often able to carry out credit reference checks as lenders. In most instances a company will need to be authorised or regulated by the Financial Conduct Authority before they can request credit information.

Letting agents will usually be able to conduct a credit reference check for you if you’re using their services, either on a fully managed or tenant finding basis. In most cases letting agents will also use a third party.

It isn’t difficult to find a third party to conduct a check on your behalf, a quick search online will reveal a number of third parties you can use. If you’re a member of the NRLA, you may find you can get a discount on credit referencing checks. You can go through online letting agents like Open Rent or you can go directly via the credit reference agency.

When using a third party make sure you know what you’re getting for your money. As with all things prices differ and so do the services offered. Just because someone is offering a cheap credit reference check, it doesn’t necessarily mean that’s the best option for you. Make sure you understand what the credit reference check will cover before committing.

How Much do Credit Reference Checks Cost?

In general, the fee can be anywhere from £5 to £30 for a credit reference check. You should expect to pay around £15-£20. Any less than this and you should double-check that you’re definitely getting a comprehensive check. Any more than this and you should find out what extra you’re getting for your money.

Costs of credit reference checks differ depending on how you carry out the check. If you use a letting agent you might find the cost of the credit reference check is bundled into the package you buy. This isn’t necessarily the cheapest way to conduct a check though as letting agents will often tack on admin fees. If you’re an NRLA member and you go through them it may cost less than going directly through one of the referencing agencies. The cost will also depend on what kind of check you conduct, a soft search will usually cost less than a hard search, but it will also give you less information.

Can Tenants Tell When You’ve Done a Credit Reference Check?

It’s important to obtain permission from the tenant before you conduct a credit reference check. Most third parties that run credit checks will require written authorisation from your tenant before conducting the check. So yes, from this perspective, a tenant should know that you’re carrying out a check. If you carry out a check without a tenant’s authorisation, they may still know that you’ve done this and, in some cases, may be able to take legal action against you for doing so without permission.

Anyone can tell when you’ve conducted a credit reference check if they have an account with one of the credit reference agencies and keep track of their credit score. You can sign up to any of the three credit reference agencies as mentioned previously. Signing up for these accounts will allow you to see what your credit score is and what data the credit reference agency has on you. This is useful if you need to monitor your credit score due to bad credit or you just want to keep an eye on things to ensure you’re not a victim of identity theft etc. Once you’ve signed up, you’ll also be able to see if anyone has conducted a check on you.

Letting to Tenants With a bad Credit Score

There could be a number of reasons why a tenant has bad credit. They may have CCJs which indicate that they’ve had problems making payments on time in the past, or they may just have a ‘thin file’. This can occur when someone has had very little credit in the past. This isn’t necessarily an indication of bad credit, it might just mean that the tenant is good at managing their finances and has never had to take on any debt. It is wise to consider each case on its own merit. Bad credit isn’t in itself a deal breaker. If you’ve got a tenant with bad credit or one who just has no credit data and you’re worried about affordability you can ask for some bank statements to give you more of an idea if there is money coming in and how this is handled, and you can also ask for a guarantor. This is quite common in the case of someone who doesn’t have any credit information as the guarantor will be expected to pay the rent on behalf of the tenant if they don’t make payments, which acts as a bit of extra security for you.

Should you Credit Check a Guarantor?

Yes, you absolutely should credit check a guarantor.

A guarantor is essentially responsible for making rental payments if the tenant can’t, for this reason you need to conduct the usual checks on a guarantor that you would on a tenant. If the credit report reveals that the guarantor is overindebted or has struggled to make payments in the past, you may want to request that the tenant uses a different guarantor.

So that’s the end of our guide on landlord credit reference checks. Remember that you should look at each case on its own merit. A bad credit score isn’t necessarily indicative that a person isn’t reliable, and you probably shouldn’t ignore a credit report that shows a history of unreliable payments.

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