Why do employers check credit history? Employers use credit reports to judge how responsible and financially stable you are. The results of a credit check can hinder your chances of getting a job offer if your credit report isn't top-notch.
In most states, employers can, with your permission, check your credit history as part of the job application process and what they discover can be an issue for job seekers.
What Employers Can – and Can’t – Learn From a Credit Check
Your credit score and credit report are not interchangeable, even though many people use them that way. Your credit score, the three-digit number that signifies your loan-worthiness to lenders, is not part of the report that’s available to prospective employers. So, when you authorize a credit check, you’re not sharing your digits, so to speak.
Of course, there’s a lot that employers can learn from the employment-screening version of your credit report, even without that score. That includes how much credit you have, how much credit you’re using, and whether you’re habitually late with your bills. In short, employers get all the information that goes into making up your credit score, but not the score itself.
However, they can’t learn anything without your permission. Before a company can run a credit report for employment purposes, they must notify you in writing and get your written authorization.
As of 2018, 11 states go even further than that, limiting the degree to which employers can use credit checks in making employment decisions. For example, California prohibits most employers from gathering credit information for the purposes of making hiring decisions. The exceptions include specific jobs – including managerial roles, law enforcement jobs, or positions with the state department of justice – and certain responsibilities, such as transferring money on the employer’s behalf or regularly having access to more than $10,000 during a workday.
Credit Report Red Flags
What items in your credit report could be a problem when it comes to getting hired? There are several red flags that employers are going to pay attention to if they run a credit report and use it as part of the decision-making process.
Ken Lin, founder and CEO of Credit Karma, shared information with The Balance Careers on the items in a credit report that may appear as red flags to employers. These red flags include:
Liens - Any type of lien against you could be a sign of irresponsibility. It suggests to employers that you weren't responsible enough to pay off your debt or negotiate a settlement.
100 Percent Credit Utilization - This shows employers that you're in over your head and can't stick to a budget.
Bankruptcy/Foreclosure - Again this shows a lack of responsibility for things you're committed to. To an employer, this could suggest that you'll bail on large projects and aren't resourceful enough.
Recent Late Fees - Recent 30-, 60-, or 90-day late fees show finances are causing you significant stress. This activity may appear as more of a red flag for financial positions because it suggests you have trouble budgeting.
Significant Activity - A recent opening of several new accounts or closing of several accounts could appear as a red flag. Significant new activity may trigger employees to think you are desperate and need extra credit because you are in over your head. Closing several accounts could appear as a sign that you aren't good with money and don't know how to avoid charging up a large sum of debt.
What to Do If You’re Worried About a Pre-Employment Credit Check
Familiarize yourself with your credit report. Under the Fair Credit Reporting Act, you’re entitled to a free credit report from each of the three major credit reporting agencies every 12 months. These reports contain similar information to the employment-screening report that would be available to a prospective employer. (You can also get your free FICO score, but that’s less relevant to your employment situation.)
Fix anything that’s incorrect. A 2012 study from the FTC found that one in five American consumers had an error on one of their three credit reports. Five percent of consumers had an error that was serious enough to lead to them paying higher rates on loans. It’s possible that a mistake is all that’s standing between you and getting hired.
Don’t be scared off by a potential issue on your credit report. What seems serious to you might not phase an employer. Or, you might be able to provide a reasonable explanation for a negative item and convince the hiring manager. If you think the employer is using credit reporting as a cover for more discriminatory practices, don’t hesitate to contact the Equal Employment Opportunity Commission. They can determine if the employer is using credit reporting as a viable part of its screening process related to business necessity.
Be prepared to explain your situation (but wait to be asked). Don’t bring up your credit history unless asked – again, you never know what a hiring manager might take in stride. But, be prepared to give context to anything negative that might come up. Employers that conduct credit checks as part of hiring are primarily worried about dishonesty or financial irresponsibility that might make you a risky hire. But, bad things happen to good people all the time. A temporary reversal probably won’t reflect as poorly on you as you think.
The information contained in this article is not legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law.