What does getting a phone contract, buying a car and renting an apartment have in common? Each one will require a credit check—a glimpse into the detailed data that highlights whether or not you can be trusted to honour your contract and pay your bills.
But there’s a problem with the system of collecting credit score information. At present, your credit score is based on the FICO scoring system which was introduced in 1989 and consists of five major categories: payment history, types of credit used, new credit accounts, debts and your credit history. The problem, however, is that credit scores have become the go-to mechanism for establishing whether or not you’re a good customer—and they don’t always capture the truth.
“We have a situation where the credit score is now being needed for everything,” says Toronto paralegal Dan Barnabic, who represents clients in credit disputes. In the past, your credit score was intended solely to determine whether you could qualify for loans or credit cards, and at what interest rates and what limits. But now they’re checked when you get a cellphone plan, rent an apartment or even apply for a job.
In a tight rental market, like Canada, that means any strike against you can mean losing out on a great place to live.
Yet, you can’t blame a landlord for wanting to verify whether or not you’re a good tenant. Over the years, websites and self-report systems have cropped up, but either they’re too localized, get outdated quickly or they cost too much for the small landlord to join and use. It was a situation Milan Vrekic found himself facing as a Dartmouth, N.S. landlord.
“By the time I screened applicants, chased rent cheques, dealt with tenant damage and posted vacancy ads I was earning well under minimum wage,” explains Vrekic. More precisely, he was earning about $3.50 per hour.
At the core of Vrekic’s frustration was the difficult task of trying to find a good tenant; a tenant that pays their bills and renews their lease. “The biggest cost to landlords is churn,” says Vrekic, with the average North American tenant staying in a rental unit for only 1.3 years.
Vrekic’s only recourse, other than relying on luck, was to screen his tenants and check their credit score. While this could give him insight as to whether or not a potential new tenant would pay their rent, it shed no insight into whether or not they’d renew their lease. “Yet, there’s a strong correlation between how far a person lives from work, and whether or not they’ll renew their lease,” explains Vrekic. That’s when he decided: There had to be a better way.
Almost five years later, he has an answer. Better yet, the answer should work for every landlord in North America—and may even help tenants.
Why this works for landlords
Vrekic’s answer was to develop Z Score. Offered as a proprietary service through his startup, Zora Computing Inc., Vrekic provides a cheaper, easier, less risky option for landlords to check out potential tenants. For only $1.99 per rental, per month, a landlord can invite prospective tenants to apply using Z Score. No contracts. No hidden fees. “We really believe in the value of our service,” says Vrekic. Part of his confidence comes from the fact that landlords that have used Z Score have cut their default rates by 48%.
As an alternative to the traditional credit check, Z Score lets landlords examine each potential tenant based on a quantifiable score—from one to 100—based on more than 80 risk factors. How often you’ve moved, whether your employment references match your social profile, and how close your current job is to the potential rental unit are among the many factors that go into your Z Score, says Vrekic. The higher a tenant’s Z Score, the more likely the potential tenant will not only pay on time, but honour and even renew their lease.
“Essentially, I created the service I wish I had when I started as a landlord.”
Why this works for tenants
On the surface, the use of credit scores appears to benefit would-be tenants—people who work, pay their bills on time and are responsible members of society. But studies out of the U.S. show that while credit scoring favours responsible credit-users, it can penalize others unfairly.
According to the studies, anyone who is in a lower income tax bracket, pays cash for most transactions or is either retired or single can be penalized when credit scores are used. “If you pay bills in cash or rely on a line of credit or loan, like a small business owner often does, then you’ll have a terrible credit score even if you always pay your bills on time,” explains Michael Brattman, vice-president of personal insurance at Erb Insurance Brokers.
If you know you fall into these categories and decline a credit check, it could prompt a landlord to become suspicious. One Toronto landlord recalls how a career wait-staff server came to her with a long explanation of how she paid everything in cash. When she checked the woman’s credit history it was spotty, at best. On a hunch (and after doing reference checks and employer verification) she decided to take a chance. Five years later, this woman is the best tenant she’s ever had.
Better still, it’s absolutely free for tenants. “As soon as a landlord invites a prospective tenant to apply using Z Score, a profile is created, free of charge, that can be used to apply to multiple units. And just like your credit score, a tenant can learn what ways they can improve their Z Score.
How the Z Score works
Initially, a landlord must pay for the service and then ask prospective tenants to apply using an online Z Score application. “The tenant gets an invite from the landlord through email, fills out the application—opting in and out of how much information they want to provide—and then submits the form to the landlord directly.” By reviewing each applicant’s Z Score—a rating from one to 100, where 100 is perfect—a landlord can choose a tenant. More than one tenant can be offered the tenancy, says Vrekic, and the contract closes as soon as one accepts. Once a tenant is chosen and agreed to the lease, the application for that rental unit is frozen, but now the tenant can use the same application to apply for other rental units.
For tenants, Z Score offers them insight into how they can improve their scores and become more desirable to future landlords, says Vrekic. The software sifts through your presence on social media platforms (like LinkedIn, Google+ and Facebook) analyzing what it finds. For instance, if you have a lot of photos shot in pubs, your Z Score will be lower. By removing those photos, you may increase your Z Score, says Vrekic.
Why this will change the rental industry
Truth be told, using traditional credit scores to screen potential tenants was a flawed approach, says Vrekic. “A credit score can only tell you who’s financeable, not who is reliable.”
Your FICO score is intended to help financial institutions make complex, high-volume decisions about creditworthiness. (Prior to the introduction of FICO in the late 80s, banks had to review a borrower’s detailed credit report line by line to determine their risk.) FICO simplified the process by using a mathematical formula to distill that information into a three-digit number that indicated how likely you were to pay a loan on time. FICO is great if you’re applying for a bank loan—as it relies heavily on a consumer’s use of big bank financial products such as credit cards and mortgages—but not so good for other things, like finding a good rental.
Worse, is how short-term problems can impact your credit score, even if your reliability hasn’t changed. It’s a situation that Ontario-based insurance broker, Bryan Yetman, has regularly witnessed first-hand. A few years ago he dealt with a woman who had been diagnosed with breast cancer while in the midst of a divorce. The client needed a double mastectomy, which required time off work. As a result, she missed some bill payments and her credit score plummeted. A short while later, the divorce was finalized and she returned to work. But in response to the temporary setback, and her new lower credit score, her home insurance provider doubled her premiums. Her reliability had not changed—her credit score had.
Why this may actually change the credit industry
The good news is that no one can check your credit score without your permission. But that leaves many consumers in a tough spot. Either they’re unaware they’ve given permission or they get penalized for not giving permission. Z Score may be a better option. That’s because the application of Zora’s algorithm could extend well beyond real estate—and eventually provide an alternative to the use of traditional credit checks.
At present there are two competing firms—Transunion and Equifax—that dominate the credit score business in Canada. These firms collect payment information from lenders and other companies, aggregating, analyzing and selling it back to them in the form of credit reports and that all-important credit score. But with Z Score, lenders and other companies may have an alternative, cheaper and perhaps more predictive option for screening potential customers.
Z Score isn’t the first to challenge the FICO stronghold, and it may not survive if it can’t aggregate enough data. In the market as a Beta version for the last couple of years, Z Score currently draws on data from online applications of potential tenants, as well as from social media sites, such as LinkedIn and Facebook. The biggest challenge it now faces is how to get more data. Vrekic isn’t worried. As the technology is used more widely, Zora will accumulate an unprecedented amount of data and that will make the major credit industry players take notice. “Then they’ll have to come talk to us.” Reach this critical point and Z Score could become a serious competitor of FICO’s credit scores.
Turns out Vrekic isn’t the only paying attention to the fallibility of the credit score. The credit reporting industry is actually working on their own alternative scores. In 2015, the New York Times ran an article where the creator of the FICO score, Fair Isaac, mentioned that he’d been testing out a new score that looked at other variables, such as cable and cellphone bills. At the same time, the U.S. arm of TransUnion also announced that it was introducing an alternative scoring system aimed at assigning scores to people who aren’t ideal borrowers, but may be reliable consumers.
Vrekic isn’t worried. He’s got a two-year head start on the beta version of Z Score and his system is starting to amass a large quantity of information. “We just want to be part of the group that fixes the credit score system.”