Landlord Business Solutions

An interesting concept came up recently that proposes the idea of basing a resident’s rent on their credit score.

It’s argued that if banks determine a borrowers interest rate based on their credit to offset their credit risk, why shouldn’t the same rules apply to residents in your rental properties?

The Fair Credit Reporting Act (FCRA) which regulates the collection, dissemination, and use of consumer credit information, allows us landlords to run credit on prospective residents with their permission.

The question remains, however, what can you do with this information, and can, or more importantly, SHOULD you base their rental rate on their credit?

The Equal Credit Opportunity Act (“ECOA”) prohibits granters of credit from discriminating against borrowers based on factors that don’t have to do with their credit worthiness. This covers race, color, religion, national origin, gender, marital status or age, together referred to as “Prohibited Basis” by the ECOA.

This means that us landlords CAN discriminate against prospective residents based on their credit report, with the only limitation being that one often can not use credit worthiness to discriminate against the poor or recipients of federal / local housing assistance.

Many landlords offer a rent “discount” for residents who pay on time, effectively turning the “stick” of a late payment penalty into a “carrot” of a pay-on-time discount with excellent results.

This bypasses the credit issue, effectively avoiding the credit risk penalty by incentivising everyone, regardless of history, to pay on time and rewarding those who do.

As a landlord, if you do decide that you want to charge poor-credit residents a higher rent, check your local and state laws, as it may be outright illegal to do in your market.