Running a Credit Check on a Tenant in Ontario

A Comprehensive Guide to Running a Credit Check on a Tenant in Ontario

As a landlord in Ontario, one of the most important steps in selecting a reliable tenant is conducting a thorough credit check. A credit check provides valuable insight into a potential tenant’s financial history, helping landlords assess whether the tenant is likely to pay rent on time and manage their financial responsibilities. It’s an essential part of tenant screening that can help reduce the risk of future rent defaults or financial disputes.

In this detailed guide, we’ll explore the importance of credit checks, the legal requirements in Ontario, how to perform a credit check, and what to do with the information you gather to make informed rental decisions.

Why Run a Credit Check on a Tenant?

A credit check is one of the most reliable ways to evaluate a tenant’s financial stability and their ability to meet rental obligations. Here are the key reasons why a credit check is an essential part of tenant screening:

1. Assess Financial Responsibility

• A credit report provides a snapshot of the tenant’s financial behavior, including their payment history for credit cards, loans, and other financial obligations. Consistent payment patterns show financial responsibility, which is a good indicator that the tenant will pay rent on time.

2. Identify Existing Debts

• The credit report shows any outstanding debts or loans the tenant is currently repaying. A tenant with high debt may struggle to meet their rent payments if their income doesn’t cover both the rent and their debt obligations.

3. Spot Red Flags

• A credit report can reveal red flags, such as late payments, collections, bankruptcies, or judgments. These are signs that the tenant may have had difficulty managing their finances in the past, which could be a risk for the landlord.

4. Verify Identity and Employment

• The credit report typically includes personal information such as full name, addresses, and employer details. This can help verify the information the tenant provided on their rental application, ensuring that the tenant’s identity and employment history are accurate.

Is a Credit Check Legal in Ontario?

Yes, running a credit check on a prospective tenant is legal in Ontario, but it must be done in compliance with both provincial laws and federal privacy regulations.

1. Consent is Required

• Landlords must obtain written consent from the tenant before running a credit check. You cannot legally run a credit check without the tenant’s permission, as this would violate privacy laws. It is common to include a clause in the rental application form that asks for the tenant’s consent to conduct a credit check.

2. Compliance with PIPEDA

• The Personal Information Protection and Electronic Documents Act (PIPEDA) regulates how businesses in Canada, including landlords, handle personal information. When running a credit check, landlords must ensure that they are handling the tenant’s information responsibly and that it is used only for tenant screening purposes.

3. Use of Credit Reports

• A tenant’s credit report should only be used to assess their suitability as a tenant. Landlords are not permitted to use this information for other purposes, and it should be kept confidential.

How to Run a Credit Check on a Tenant in Ontario

Performing a credit check on a prospective tenant is a straightforward process once you have the tenant’s consent. Here are the steps to follow:

1. Obtain the Tenant’s Consent

• First and foremost, you must receive written consent from the tenant to run the credit check. This can be included in the rental application form or in a separate document that the tenant signs. A sample consent clause might read:

“I hereby authorize the landlord or property manager to obtain a credit report from a credit reporting agency or credit bureau to verify my financial and personal information for the purposes of assessing my rental application.”

2. Collect Necessary Information from the Tenant

• To run a credit check, you will need the following information from the tenant:
  • Full name (including any middle names or previous names used).
  • Current address and previous addresses if applicable.
  • Date of birth.
  • Social Insurance Number (SIN) (optional but helpful for accuracy).
  • Employment information.
  • Rental history (previous landlords).

This information is usually provided in the tenant’s rental application.

3. Choose a Credit Reporting Service

• Landlords in Ontario can use a variety of services to run a tenant credit check. The most common options are Equifax and TransUnion, two of Canada’s largest credit bureaus. There are also third-party tenant screening services that offer credit checks along with background checks and eviction history. Here’s a brief overview of each:
• Equifax: Offers credit reports that landlords can use to check tenant creditworthiness. You can register for an Equifax account as a landlord to run credit checks directly.
• TransUnion: Another major credit bureau, TransUnion provides detailed credit reports for landlords. Like Equifax, you can sign up for an account and conduct credit checks online.
• Third-party tenant screening services: Services like SingleKey, Naborly, or Tenant Verification Service can provide comprehensive tenant screening, including credit reports, criminal background checks, and income verification. These services are convenient if you want a more complete profile of the tenant.

4. Review the Credit Report

• Once you have run the credit check, the report will provide important details about the tenant’s financial history. Key components of the credit report include:
• Credit Score: A three-digit number that summarizes the tenant’s creditworthiness. In general:
  • Excellent credit: 760 and above.
  • Good credit: 700–759.
  • Fair credit: 650–699.
  • Poor credit: Below 650.
• Payment History: This section will show whether the tenant has made timely payments on credit accounts like loans or credit cards. Late payments or missed payments are red flags.
• Outstanding Debts: This shows the total amount of debt the tenant currently owes. Large debts combined with a low income may signal a risk for the landlord.
• Public Records: Any bankruptcies, liens, or judgments will appear in this section. A history of bankruptcy or legal judgments may indicate financial instability.
• Collections: Accounts that have been sent to collections indicate a serious issue with managing debt. This can be a significant red flag.
• Credit Inquiries: Recent credit inquiries may indicate that the tenant has applied for multiple credit accounts recently, which could suggest financial distress.

5. Verify the Information

• Cross-check the information on the credit report with the details the tenant provided in their application. Look for consistency in addresses, employment, and financial obligations. If there are discrepancies, it’s important to ask the tenant for clarification before making any decisions.

How to Interpret a Tenant’s Credit Report

Once you’ve received the credit report, it’s important to know how to interpret the data to make an informed decision. Here’s what to look for:

1. Credit Score

• A high credit score (typically 700 and above) indicates that the tenant has a strong financial history and is likely to pay rent on time. A low credit score (below 650) may suggest the tenant has had financial struggles or a history of missed payments.
• While a credit score is a helpful indicator, it should not be the sole factor in your decision. Some tenants may have a lower credit score due to unique circumstances, such as a recent divorce or medical bills.

2. Payment History

• Consistent, on-time payments on credit cards, loans, and other financial obligations are strong signs of financial reliability. If the tenant has a history of late payments, this could indicate a risk that they may not pay rent on time.
• A few isolated late payments are not necessarily a deal-breaker, but a pattern of missed payments should raise concerns.

3. Debt-to-Income Ratio

• The tenant’s debt-to-income ratio can be calculated by comparing their monthly income to their total monthly debt obligations. If a tenant has significant debt compared to their income, they may have difficulty paying rent.

4. Bankruptcy or Collections

• If the tenant has filed for bankruptcy or has accounts in collections, this is usually a significant red flag. A recent bankruptcy may indicate ongoing financial trouble, and collections show that the tenant has failed to repay debts in the past.
• If the bankruptcy was several years ago, it may be worth discussing the situation with the tenant to understand what led to it and whether they have since improved their financial management.

5. Public Records

• If there are legal judgments or liens against the tenant, it’s essential to investigate further. These can be indicators of severe financial problems, and a history of judgments can suggest that creditors have had to take legal action to recover money owed by the tenant.

What to Do After Running a Tenant Credit Check

After reviewing the tenant’s credit report, the next step is to make an informed decision about whether to approve or decline their rental application.

1. Discuss Any Concerns

• If the credit check reveals red flags (such as a low credit score, late payments, or high debt), consider discussing the issues with the tenant. Some tenants may have valid explanations for financial struggles, such as a recent job loss or medical expenses, and they may still be reliable renters.
• Ask for additional proof of income or references to verify the tenant’s ability to pay rent despite any financial issues they may have faced in the past. You could also ask for a co-signer or a larger security deposit if you’re still concerned.

2. Use Credit Information in Combination with Other Factors

• While a credit report is a valuable tool, it should be considered alongside other factors, such as the tenant’s income, employment history, rental references, and personal character. A tenant with a lower credit score but strong references and stable income may still be a good fit.
• Likewise, a tenant with a high credit score but poor rental history (e.g., conflicts with previous landlords) could still pose a risk. Be sure to consider the overall picture rather than focusing solely on the credit score.

3. Approve or Decline the Application

• Based on the results of the credit check and other screening criteria, you can decide whether to approve or decline the tenant’s rental application. If the tenant passes the screening process and the credit check is satisfactory, you can move forward with drafting the lease agreement.
• If you decide to decline the application, it is best practice to inform the tenant politely and briefly explain that their application did not meet your criteria. You are not required to provide specific reasons, but being transparent can help avoid misunderstandings.

4. Document Your Decision

• Always document the reasons for your decision, especially if you decline an application. This protects you in case of any disputes or claims of discrimination. Make sure your decision is based on legitimate financial criteria and not personal characteristics that are protected under Ontario’s Human Rights Code (e.g., race, gender, age, disability).

Common Challenges and How to Address Them

When running credit checks on potential tenants, you may encounter certain challenges. Here are some common scenarios and how to handle them:

1. Tenant Has No Credit History

• Some tenants, particularly young renters or newcomers to Canada, may not have an established credit history. In this case, you can:
  • Request alternative proof of financial responsibility, such as bank statements or utility payment records.
  • Ask for a co-signer who has a good credit history.
  • Verify their employment stability and income to ensure they can afford the rent.
  • Speak to previous landlords to gather insights on their rental payment history.

2. Low Credit Score Due to Circumstances Beyond Control

• Sometimes, a tenant may have a low credit score due to events beyond their control, such as a medical emergency, job loss, or divorce. If a prospective tenant has a reasonable explanation for their low credit score, consider:
  • Asking for additional references from employers or landlords to verify their reliability.
  • Assessing their current financial stability, rather than solely relying on past issues.
  • Offering a conditional approval where they can rent the unit with a co-signer, or agree to a shorter-term lease with the option to extend based on performance.

3. Tenant Refuses to Consent to a Credit Check

• If a tenant refuses to consent to a credit check, it’s within your rights to decline their application. However, if the tenant has concerns about privacy, you can reassure them that the credit check is standard practice and that their information will be handled confidentially.

4. Inaccuracies on the Credit Report

• Occasionally, a tenant may claim that there are errors on their credit report. Encourage the tenant to reach out to the credit bureau (Equifax or TransUnion) to correct any mistakes. You can also ask the tenant to provide documentation that supports their claim (e.g., proof of payment).

Best Practices for Running a Credit Check on Tenants

To ensure a smooth and legally compliant process when running credit checks on prospective tenants, follow these best practices:

1. Always Obtain Written Consent

• Ensure you have the tenant’s written consent to run a credit check, as required by law. Consent should be obtained as part of the rental application process.

2. Use Reputable Credit Reporting Agencies

• Stick to recognized credit reporting agencies such as Equifax and TransUnion, or reputable tenant screening services that follow privacy laws and provide accurate, up-to-date reports.

3. Combine the Credit Check with Other Screening Tools

• Use the credit check as part of a broader tenant screening process. This can include verifying income, employment, and rental history, as well as conducting reference checks.

4. Keep Tenant Information Confidential

• Handle the tenant’s personal and financial information with care. Do not share credit report details with anyone who is not authorized to see them. Store the information securely and only use it for the purpose of assessing the rental application.

5. Be Consistent in Your Screening Process

• Apply the same criteria to every prospective tenant to avoid claims of discrimination. Establish a clear set of rental criteria (e.g., minimum credit score, rent-to-income ratio) and stick to it for all applicants.

The Importance of Credit Checks in Tenant Screening

Running a credit check is a critical step in the tenant screening process for Ontario landlords. It provides insight into a tenant’s financial history and helps assess whether they can reliably pay rent on time. By following the legal requirements, obtaining tenant consent, and using the information from the credit check in combination with other screening tools, landlords can make informed decisions and reduce the risks associated with renting to unreliable tenants.

A well-conducted credit check, when done responsibly and ethically, protects both landlords and tenants by ensuring a good match for the rental property. If you are unsure about any part of the process or how to handle specific scenarios, consulting with a legal expert or a professional property manager can help ensure that you are compliant with Ontario laws and best practices in tenant screening.