A credit risk from a landlord’s perspective is the possibility of a tenant not being able to pay the complete rent and/or the inability of a tenant to pay rent on time. Therefore, it is always desirable for a landlord to select a tenant who exposes him/her to a low credit risk.
The credit check is the method used to assess the credit risk posed by a potential tenant. It analyses the potential tenant’s bank account, County Court Judgments, and other similar documents to determine his/her financial position and discipline. A credit check reveals whether a potential tenant is in debt, whether he/she has ever missed repayments and whether he/she has made bankruptcy declarations in the past. The data obtained from a credit check is used to create a credit score for the potential tenant. The higher the credit score of the potential tenant, the lower the credit risk for the landlord. Credit checks are done for landlords by various tenant screening agencies. A landlord may choose the right tenant screening service based on the criteria used by the agency for credit checks, the reliability of the tenant screening service as confirmed by other landlords and the price levied by the tenant screening service for credit checks.
The test to determine whether a potential tenant can afford the rent of the property is to check whether the annual household income of the potential tenant is at least 2.5 times the annual rent of the property. If the annual household income of a potential tenant is less than 2.5 times the annual rent of the property, it means that the potential tenant might not be able to afford the rent and may not pay the rent on time.
Sometimes, a potential tenant who fails the affordability calculation given above might still be able to afford the rent on the property as the potential tenant has savings or is supported by the potential tenant’s parents or the potential tenant has a student loan which will cover the rent. In such circumstances, it is best for a landlord to agree to give the property on rent to the potential tenant only if the potential tenant is able to provide a guarantor. A guarantor must be a resident of the United Kingdom, must have the financial capacity to pay the tenant's rent in case the tenant defaults and must have a good credit score.