Business Opinion

OPINION: The End Of Credit Checks

Chad Guziewicz, Co-Founder of Rentify, shares his opinion on credit checks and the end of their era.

When it comes to evaluating someone’s financial health, the gold standard is the credit check. Developed in the late 1980s, these snapshots have become the go-to tool to determine if a person is a good risk or not. Having a good credit score can open a lot of doors, but a low number can lead to getting declined for a car loan, mortgage, or even a job. Given their importance, you would think that credit checks would be foolproof. In fact, there are serious problems with how they are scored, and even error-free credit checks don’t contain the useful information that would provide an accurate view of whether or not a person should get a loan. And in light of the current housing shortage in many Canadian cities right now, numerous good prospective tenants are being turned away while people with a low likelihood of making rent are able to find units. We need a better way.

Let’s start with a bit of history

Lenders have based their financial decisions on the perceived financial health of borrowers for literally thousands of years. In the 20th century, as personal finances got more and more complicated, it became harder to conduct a simple verification to determine whether or not someone was a good credit risk or not. In 1989, the FICO score was introduced to provide an apples-to-apples way of evaluating the financial health of individuals. In Canada, this score is based on credit reports conducted by two major credit bureaus, Equifax and TransUnion. This sounds like a pretty good idea, right? Not so fast.

For starters, credit reports only look at a person’s history of paying their credit cards and store-issued cards. That is important information in some cases, of course, but it isn’t especially relevant when a landlord wants to figure out if someone can make rent. That’s because credit scores don’t provide any information on whether or not a person has enough money in his or her bank account, or if there is a history of bouncing cheques. They can’t even provide basic information about a person’s spending habits — which is critical information to any landlord who wants to avoid rent disputes.

And as limited as credit checks are, what’s even worse is that so few of them are accurate. There are a lot of numbers floating out there, but in the United States it is estimated that a full 20% of credit reports have “significant” problems, and more than 50% have some sort of error. It’s pretty astounding to think about that. After all, if credit checks are going to be incomplete even on their best day, they should at least provide truthful information. But most of them don’t.

So what is the answer?

The good news is that the information that property owners and lenders need is only a click away — and credit checks don’t even factor into the equation. While the TransUnions and Equifaxes of the world are busy compiling information from dozens of sources (and making plenty of mistakes while doing it), banks actually have the snapshot of data that landlords need to make intelligent decisions. For example, a bank can let a prospective lender know if a person has a negative bank balance on the last day of every month, if he or she has dipped into overdraft on a regular basis, or if there is a regular paycheque that comes every two weeks. Those are things that matter, but that credit checks simply can’t deliver.

If bank checks are so much more effective than traditional credit checks, why are they not the industry standard for landlords? The main reason is habit: people are conditioned to think of credit checks when they are assessing a potential candidate to rent a unit. The major credit bureaus have spent billions of dollars positioning themselves as the tool of choice, even if they really aren’t up for the job. That’s a challenging obstacle to overcome. But it’s not impossible, and in fact it is already happening. Over the next decade we can expect to see this become the norm as property owners and prospective renters realize that credit checks don’t actually provide any positive value for all those involved in a real estate transaction process.

Chad Guziewicz is Co-Founder of Rentify, the leader in bank checks, an instant screening tool used to verify tenant application data by landlords and property managers across North America. Chad is a 2x start-up entrepreneur, previously co-founding Tire Wizard, which is used today by 95% of Canada’s auto dealerships to sell aftermarket tires and accessories. Prior to Tire Wizard, Chad had extensive experience in the property management industry which fuelled the inspiration for Rentify.