Whether you fully manage properties on behalf of landlords or offer a tenant-finding service, a tenant credit check is a vital part of the process.
While no tenant referencing service can guarantee you won’t have problems with tenants, affordability and credit checks can help lower the risk of tenants defaulting. Here’s what the process involves, its importance, and how much it costs.
The importance of tenant credit checks
Tenant credit checks are essential to any tenant referencing service and help minimise the risk of taking on a tenant who’s likely to default.
To carry out a credit check, agencies can use one of the UK’s three main credit reference agencies (Experian, TransUnion, Equifax), but this only offers limited insight.
Tenant credit checks should be carried out alongside other types of tenant referencing. A number of providers offer an all-round service that also looks at references from employers and previous landlords, and confirms employment status and the right-to-rent.
These comprehensive checks should only take a few days but can help you give landlords greater clarity over potential tenants, helping you find good tenants that are financially reliable.
Bear in mind that if you provide rent guarantee insurance as part of your managed service, or if your landlord has a policy in their own name, confirming affordability and carrying out tenant referencing are conditions of the policy.
What information does a tenant credit check show?
Tenant credit checks only show publicly available information but will flag any current or recent financial issues, including bankruptcy, fraud convictions, and CCJs.
You’ll also be able to see the tenant’s electoral roll status.
What information isn’t shown in a tenant credit check?
You won’t be able to see any credit arrangements tenants have (such as hire purchase or credit card debt). Credit checks won’t give you insight into day-to-day financial habits, but an affordability check can.
What’s the difference between a credit check and an affordability check?
Tenant credit checks count as soft searches and only highlight major issues. Affordability checks include asking for bank statements and confirming employment status to stress-test a tenant’s finances.
Ideally, tenants should earn at least 2.5 times more than their annual rent. This allows for some leeway if they face any unexpected expenses.
What information do I need to carry out a tenant credit check?
You must have the tenant’s permission to carry out a credit check. This should be in writing.
If you’re only carrying out a credit check using one of the credit reference agencies, the agency will specify what you need. At the very least, you’ll need the tenant’s full name, address history, and date of birth.
If your letting agency uses a third-party referencing service, the process is usually automated, so tenants are sent an email and asked to provide their details.
Is a credit check a condition of landlord insurance?
The terms and conditions of a rent guarantee policy will specify that tenant referencing (including a credit check) is carried out.
If landlords haven’t carried out the appropriate checks (including right-to-rent checks), policies could be voided, and insurers can reject a claim.
Landlord insurance policies will normally specify that an assured shorthold tenancy agreement is in place, but not that the tenant must be referenced (although we would always recommend this be completed anyway).
Can we charge tenants for a credit check?
No. Under the terms of the Tenant Fees Act 2019, you can’t charge tenants for a credit check.
Asking tenants to cover the cost of a credit check would be considered a ‘prohibited payment’, which is banned under the act and can result in a fine of up to £5,000. In a worst-case scenario, it could lead to a fine of up to £30,000 or even end in prosecution.
Supporting landlords to find good long-term tenants
Credit checks and tenant referencing aren’t foolproof, but they can be a good starting point when determining who to rent to. As an added line of defence protecting your landlord’s income and your management fee, consider rent guarantee insurance.
To find out more, contact our team on 01603 649727.
