When tenants become problem payors you have a couple of options including reporting tenants to credit bureaus.
An unfortunate reality of property management is the inevitability of dealing with slow-pay and no-pay tenants. Even though a tenant may pass your initial creditworthiness processes at application time, it’s impossible to predict if circumstances or intentions will change and the tenant will become a problem payor. When that happens, you have a couple of options.
Sure, letters, increasingly serious notices, personal visits, and stern phone calls are always the first steps to collecting, but what happens when those don’t work? Many property managers turn to collection agencies, but more and more are opting to report delinquent payment histories to the big credit agencies using credit reporting services like Datalinx.
Some property management organizations assume that credit reporting isn’t an option for them; either they think their reports will be too small to be accepted, don’t think they qualify as a creditor, or simply don’t know where to start. Companies like Datalinx acknowledged these issues, and since 2001 has been refining the process to make reporting to the big credit bureaus easy and affordable, which in turn makes this a very powerful and effective solution.
Do They Care About Credit?
For some consumers, credit scores are simply not an issue. Either they have no need to apply for credit, or they have simply decimated their credit score to what they think is a point of no return. Fortunately, those types of tenants probably wouldn’t have made it through your application process to begin with.
However, most people do care about their credit, and understand the impact a negative item will have on their future. Today, credit card companies, banks, and free credit monitoring apps provide credit scores to customers on a regular basis, indicating that more and more consumers are concerned about protecting their record.
Sometimes, simply notifying the customer that you now report missed or late payments to the four major credit bureaus will motivate them to pay on time. It certainly never hurts to remind them of your ability to report this information. Often tenants are under the false impression that rent payments are not reportable for credit bureau purposes. However, services like Datalinx now offer property owners and managers the ability to report all payment histories, whether positive or negative. Informing your tenants that this is your practice and intention can make a big difference in the timeliness of payments, dues, and more.
One of the questions consumers are most curious about when it comes to credit reporting is how long information—especially negative information—will remain on their report. No one wants one missed payment or short-term collection account to negatively impact personal credit decisions for decades. Unfortunately, some tenants don’t give you any other option than to turn to alternative measures for recovering debt.
Generally speaking, negative information remains on a consumer credit report for about seven years according to Equifax, one of the major credit bureaus. Negative items can include late or missed payments, accounts that have been sent to collections agencies, situations when payments have not been paid as agreed, liens, or even bankruptcies. Seven years can be a very long time, especially when an individual applies for auto loans, new rental agreements, mortgages, or even certain jobs.
Each of these negative items not only will be listed as a red flag on a full credit report but will also drastically decrease an individual’s credit score. While some employers or organizations will listen to a consumer’s explanations or consider subsequent repayments of these debts, most simply cannot bend the rules to accept a score or report outside their established credit parameters.
As a property manager, adding this knowledge to your arsenal helps you not only educate past-due customers as to the long-term effects of their payment behaviors, but also helps you prepare new tenants with the consequences of late payments to your organization. In this case, knowledge is definitely power.
Why not consider a collection agency?
A professional collections firm is certainly an option to consider, but when considering cost and long-term impact, there are significant differences between collections and credit reporting. With a collections agency, the property owner or manager pays the agency a set fee or percentage of the amount collected from the tenant. The account is subsequently charged-off the books of the property owner or manager as a loss.
What does this mean for the consumer? First, the collection agency will report the account to the credit bureaus, and the debt will appear as a collection on the tenant’s credit report, instantly impacting their credit score. And, of course, this will be a negative item on the credit report for seven years from the date of the first missed payment. If the tenant makes payments to the collection agency and pays the balance in full (usually including a fee from the collection agency), the agency will report this information as well. Paying a collections account may have a lesser impact on a credit score, but the item will still be reflected on the report.
There is another important, but often overlooked, aspect of this process. When an account is reported to the bureaus as a collection, it can never be anything but that—a collection. Datalinx recommends another alternative: consider foregoing the collection agency and reporting the past due account to the bureaus as delinquent, especially in cases where you believe the relationship with the tenant is repairable.
Why? A delinquent, or late, payment has a less negative impact on a tenant’s credit report than a collection, especially when the delinquent account is subsequently paid in full. Offering this option to a tenant also gives you as the property owner or manager leverage to urge the tenant to pay to avoid a much more detrimental impact on their credit. You lose that leverage when you turn over an account to a collections agency.
Credit is King…or Perhaps the Ace
With a credit reporting service like Datalinx in your rental or leasing toolbox, you hold the proverbial ace in the hole when it comes to persuading your tenants to pay on time. For those who care about their credit score, reports of consistent, on-time payments is an unexpected bonus to help them increase credit scores and build a solid, long-term history. This may be the impetus needed to nudge those on-the-fence individuals to pay closer to their due date instead of waiting until the last possible minute. And for the others, your Datalinx account allows you to report negative items while maintaining leverage to collect past due funds—without paying fees to a collection agency.
With Datalinx, you hold all the cards.