Landlord opens can of worms when rent based on credit score
Banks can legally charge a higher rate to a borrower with a low credit score, but it's a trickier proposition for small-time landlords who want to base their rent on the same factor.
Q. I own a small rental property, and have been running advertisements to rent one of its vacant units for $850 per month. Several people with great credit scores have applied. But if I decide to rent it to someone with a below-average credit score, would it be OK to demand an extra $100 per month for the rent because their credit history isn't good?
A. Federal law clearly permits landlords to consider an applicant's credit score when making a rental decision, but rejecting an applicant with a good credit rating and instead renting to someone with a lesser score to make an extra $100 per month would be a bad idea.
First, the person with the good credit score is more likely to pay his or her rent promptly. I'd rather lease to a tenant whose score suggests that the bill will be paid on time, instead of renting the place for an extra $100 per month to someone who may not be as reliable -- and perhaps later cost hundreds or thousands of dollars to evict.
In addition, offering the unit at one price but then charging a higher fee to someone else because that person has a lousy credit rating could put you in jeopardy of a discrimination lawsuit -- or maybe even two.
To illustrate, let's say that a single African-American man with an outstanding score wants to rent the unit for your advertised price of $850 per month. You decline his application, and instead select a white mother of three children (despite her bad credit score) because you want her family to have a good place to live and figure that the $100 per month more that she's willing to pay will offset any extra wear and tear that her kids might cause.
The mother could sue you after she moves in, because federal anti-discrimination laws generally prohibit landlords from charging more to someone who has children than someone who doesn't.
Meantime, the African-American man whose application you rejected would also have grounds for a lawsuit: After all, his credit score was better than the Caucasian woman's, and he was willing to pay your advertised price of $850 per month. Considering such facts, it probably wouldn't be difficult for the man to convince a judge that you had violated the fair-housing law that forbids landlords from discriminating against prospective tenants based on their race or ethnicity.
In short, select the rental applicant who has the best combination of a solid credit score -- which shows that he or she has handled debt responsibly in the past -- and a steady income that suggests that the applicant will be able to pay his or her rent in the future. Doing otherwise, even if it might pay you more, simply wouldn't be worth the risk.
Q. You recently wrote that a bankruptcy will stay on a consumer's credit report for up to 10 years. I have never filed for bankruptcy and have never even been late on a payment, so my credit rating is outstanding. How long does "good" information remain on a report?
A. Positive information about open, active accounts that you have will remain on your report indefinitely. Even if you closed one of the accounts today, your sterling payment history on the account would stay on your report for the next 10 years before being removed.
Congratulations on handling your debt obligations so responsibly. The outstanding credit score that you have earned should allow you to get the best loan terms possible when you apply for a mortgage or credit card in the future.
Q. My husband and I are thinking of creating the type of living trust that you sometimes write about, so that our home and other assets can avoid probate and instead pass quickly to our heirs when we die. But if we form a trust, do we still need an up-to-date will?
A. Yes, you should still have a will even if you create a trust, in part because a will is needed to distribute the assets that you intentionally (or perhaps mistakenly) left out of the trust.
For example, many people put all of their real estate assets and investments into an inexpensive trust so they can avoid the long and costly probate process. But they specifically leave their personal automobile out of it. The reason: If you're at fault in an auto accident and someone gets hurt, the injured party might be more inclined to sue if they see that your car's title is held in a well-funded trust rather than outside of it.
© 2007, Cowles Syndicate Inc.