Finding the right tenant is crucial to the success of your rental business. A credit check will help you determine if the potential tenant is financially responsible and has a good credit history, so conducting this check on prospective tenants is an essential step in the tenant screening process. 

However, what happens if a prospective tenant fails a credit check? Do you automatically reject their application, or is there something else you can do? In this guide, we will answer all these questions and more.

Why Credit Checks are Important for Landlords

Credit checks are a crucial part of the tenant screening process. They provide landlords with valuable information about the prospective tenant’s credit history, including their payment history, outstanding debts, and credit score.

A credit check can also help you determine if the potential tenant has a history of late payments, missed payments, or defaults. This information is critical as it will help you assess the tenant’s ability to pay rent on time and in full.

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What to Look for in a Credit Check Report

When reviewing a credit check report, there are several things you should look out for, including:

• The tenant’s credit score
• Outstanding debts
• Late or missed payments
• Defaults
• CCJs
• Bankruptcy or insolvency

A credit score is a numerical value that indicates the potential tenant’s creditworthiness. The higher the score, the better the tenant’s credit history is. Typically, a credit score of 650 or above is considered good.

Outstanding debts and late or missed payments are red flags that could indicate the tenant’s inability to pay rent on time. Defaults and bankruptcy are also warning signs that the tenant may not be financially responsible.

What Happens if a Prospective Tenant Fails a Credit Check?

 If a prospective tenant fails a credit check, it’s important to consider the reason why. Sometimes, a poor credit score is the result of a one-off event, such as a divorce or illness, and may not reflect the tenant’s ability to pay rent.

Before rejecting the tenant’s application, consider the following:

• Ask the tenant to explain the reason for their poor credit history.
• Ask for references from previous landlords or employers.
• Ask for a guarantor who can co-sign the tenancy agreement.

Alternative Tenant Screening Methods

Credit checks are not the only way to screen potential tenants. Here are some alternative methods:

• Employment and income verification: this will help you determine if the tenant can afford the rent.
• Reference checks from previous landlords: this will give you insight into the tenant’s rental history and whether they were a responsible tenant.
• Criminal background checks & rental history checks: these checks will help you determine if the tenant has a history of criminal activity or eviction.

How to Reject a Tenant Application

If you decide to reject a tenant application, it’s important to do so in a fair and legal manner. Here’s what you should do:

• Provide the tenant with a written explanation for the rejection.
• Base the rejection on specific reasons, such as poor credit history or failure to provide references.
• Keep a record of the rejection and the reasons for it.

It’s essential to avoid any discriminatory practices when rejecting a tenant’s application. Discrimination on the grounds of race, gender, religion, sexual orientation, or disability is illegal in the UK.

Frequently Asked Questions

Can I reject a tenant’s application solely based on their credit score?

No, you cannot. You must have other specific reasons, such as outstanding debts or defaults, to reject their application.

Can I ask for a higher deposit if a tenant fails a credit check?

Yes, you can. It’s common practice for landlords to ask for a higher deposit if a tenant fails a credit check. However, you must ensure that the deposit amount does not exceed the legal limit of five weeks’ rent for annual rent under £50,000.

Can I still rent to a tenant who fails a credit check?

Yes, you can. Failing a credit check does not automatically disqualify a tenant from renting a property. You should consider other factors, such as references from previous landlords or employment and income verification.

Conclusion

Conducting credit checks on potential tenants is crucial for landlords. It helps you determine if the tenant is financially responsible and has a good credit history. However, if a prospective tenant fails a credit check, it’s essential to consider the reason why before rejecting their application.

 Alternative tenant screening methods, such as employment and income verification or reference checks, can also provide valuable information about the tenant. Remember to avoid any discriminatory practices when rejecting a tenant’s application and to provide a written explanation for the rejection.

 By following these guidelines, you can ensure that you find the right tenant for your rental property and protect your investment.

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