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Some landlords have eased their credit standards to allow people with credit blemishes from foreclosures to rent apartments — a practice that was largely taboo in the past.
Some landlords have eased their credit standards to allow people with credit blemishes from foreclosures to rent apartments — a practice that was largely taboo in the past. Justin Sullivan/Getty Images
Last of a two-part series
Two million homeowners or families have had their credit damaged since the housing crisis started. Meanwhile, lenders remain stingy about granting credit, even to those with good records.
But not everyone is shunning this growing population of financially disenfranchised people. There are signs that some people are willing to look past a black mark, and credit agencies are shifting the way they calculate scores.
Cindy Clare is among the people changing their view.
"In this economy and in this climate, we are seeing people who got caught up in the housing crisis, so we do take that into account," says Clare, president of Kettler Management, a company that operates 74 apartment communities in the mid-Atlantic.
Looking Beyond Foreclosure
In the past, foreclosure was an insurmountable black mark. But Clare says her company now takes into account whether applicants have income, for example, or whether they paid their other bills. And she says she's seen other companies take similar measures to accommodate some prospective renters who temporarily fell on hard times.
"[They are] relaxing their credit standards a little bit, particularly looking less at bankruptcy and foreclosure, where somebody might have gone into bankruptcy because of the housing market versus just someone that didn't want to pay all their bills, for example," Clare says. "I think the perception of that has changed in the last year."
It is still true that — next to bankruptcy — foreclosure is one of the most detrimental things for one's credit, knocking as much as 140 points off a person's score. But credit is also not static, and neither is the math that companies use to calculate credit scores.
Figuring out whether your credit score is good or bad can be a complicated process. The first step is finding out what type of credit scoring method was used. Scores are calculated using different models, and many lenders even customize the process to meet their specific criteria.
The most widely used model is based on the FICO scoring system (based on a formula by Fair Isaac and Co.), where the maximum score is 850. Another model, called VantageScore, goes up to 990. It was developed by credit reporting agencies Experian, Equifax and TransUnion.
Gail Hillebrand, a senior attorney for Consumers Union, says that these days — with tighter credit standards in play — a healthy FICO credit score is typically over 750. Using VantageScore, a healthy score is typically over 901.
Lower scores usually mean you'll pay more for a loan. An individual's credit score is typically used to determine eligibility for a mortgage, access to credit cards and a range of consumer loans including car loans. Landlords also typically check potential tenants' credit scores as part of the rental application process.
Several factors determine your credit score, including whether you've paid your credit card and loans on time; how much you owe; and how long you've had an account and the activity in it.
Credit scores are sold by Equifax, Experian and TransUnion. Consumers are eligible to receive a free annual credit report through AnnualCreditReport.com, a website underwritten by those three companies. You can also purchase your FICO score from Myfico.com.
Sarah Davies, senior vice president at VantageScore, a competitor to the better-known FICO scoring system, says even the credit score itself changes over time to reflect the realities of the market. The company can, in a sense, grade people on a curve.
VantageScore's algorithms consider types of mortgages that were available during the peak of the market several years ago, and score people based on how their behavior compares with other people with similar mortgages, Davies says.
Changing Scores, Interpretations
Davies says one side effect of that is that even a relatively decent score of 700 represents more risk than it did four years ago. So she says the score itself changes, and so will people's interpretation of the score.
"I do think lenders are going to be much more creative in how they're looking at consumers and their credit scores," she says.
But how creative they will get in their assessments is an open question.
Re-Entering The Credit Economy
Katherine Porter, a visiting professor at Harvard Law School, has studied people filing for personal bankruptcy who subsequently received, on average, one new credit card offer a week.
"Basically, they were able to re-enter the credit economy," Porter says. "But that was in a space in which there was a lot of capital floating in the markets. There were lots of people looking to make loans. Now, there's very little capital, there's very little money to be lent. People are very conservative. They're going to pick the borrower without that black mark."
In the past, few people with black marks ever crossed paths with Larisa Wells, a landlord in Elkins, W.Va., who manages five properties in the region. She says she never used to encounter low credit scores among prospective renters. But that's changed, as has her attitude about them.
"I do have a broader appreciation of foreclosures and what people are going through," Wells says. In her experience, she says, people with good credit do not necessarily make the best renters.
Instead of relying solely on credit scores, Wells now does more research, taking into account other factors, like the steadiness of an applicant's employment.
"It is a huge responsibility in having this window into people's finances," Wells says. "In fact, it's sometimes a little awkward because it's so personal for them. They are opening up their most intimate failures in some cases to a complete stranger who is sitting in judgment and deciding whether or not they get a place to live."