Job seekers who have lived through financial challenges may feel intimidated by the possibility that a potential employer might pull their credit report. Understand how and when a potential employer can check the credit reports of prospective employees, and how that information can be used to make hiring decisions.
More than half of all Americans have a sub-prime credit score, and one in four have some sort of credit problem. If you’ve experienced job loss, foreclosures, missed or late payments on credit cards or loans, or liens you may be concerned that the contents of your credit report will negatively affect your chances of getting a new job.
Because a big component of a healthy credit picture is the age of the credit history, millennials have an extra set of challenges when it comes to building a healthy credit score. Nearly three-quarters of all college students don’t know their credit score, but most understand that it will have a huge impact on their ability to buy a car, get a mortgage and find employment.
Why companies conduct credit checks on prospective employees
A recent survey by the Society of Human Resources Management (SHRM) shows that 60% of employers conduct credit checks on applicants as part of the evaluation and hiring process. They are most often looking for specific warning signs that show financial instability or lack of responsibility.
For example, 100% credit utilization may show an inability to control spending and balance a budget. A bankruptcy could point to a lack of resourcefulness or an unwillingness to take personal responsibility for mistakes. A large number of late payments spread out over time may indicate the inability to budget, or a problem with impulse control.
Jobs in the accounting field and positions that require money handling may require a clean credit report. The company doesn’t want to hire someone to handle their money if that person can’t handle his own. Companies that are responsible to shareholders and donors for large amounts of money must take responsibility for their hiring decisions, so they avoid hiring people who have the kind of money problems that may lead to financial irresponsibility – or even fraud – at work.
Many times, checking references is an inefficient or ineffective way to gather or confirm information about prospective employees. A credit report completes the picture quickly and easily. Credit reports can help potential employers verify past salary information, social security number, address, and previous employers.
Companies may also want to get a more general feel for who they are hiring. Verifying that the potential employee is financially stable may support the decision to bring that person on board.
What the law says about using credit report information to evaluate prospective employees
The Fair Credit Reporting Act (FCRA) governs when, how, and for what purposes a credit report can be used to evaluate a potential new hire. The FCRA requires employers to get written authorization from the applicant before checking his or her credit.
Even though employment-based credit checks are legal under federal law, state laws that deny employers the ability to use credit reports to evaluate the worthiness of prospective employees override more permissive federal rules. Washington, Delaware, Oregon, Vermont, Nevada, California, Colorado, Connecticut, Hawaii, Illinois, and Maryland restrict the use of credit reports by employers.
In New York City, using an individual’s credit history to deny employment is illegal, with a few exceptions related to “jobs of public trust,” high-level city workers, jobs that have fiduciary duties, and jobs that involve cyber-security risks. Citing the fact that most credit reports contain factual errors, and that pulling a credit report create a privacy issue, the city council is setting an example for other major cities with this law.
Last year, 19 states faced bills requesting similar restrictions on employer credit checks, so job seekers should expect the list of places where employer credit checks are banned or severely restricted to grow in the future.
Note that section 525(b) of the federal Bankruptcy Code prevents employers from denying a job to anyone on the grounds that they are bankrupt.
What job seekers with a messy credit report should do next
Everyone is entitled to a free credit report from each of the credit reporting agencies one time each year. Obtain them from AnnualCreditReport.com. Before launching a job search, take a close look at those reports and identify any errors. One in five Americans finds an error that negatively impacts their credit on at least one of those reports each year. You can also see a free credit report on Credit Sesame.
Clean up the reports as much as possible by requesting correction of errors via the reporting agency’s website (while you view your credit report). If you’re a Credit Sesame member, you’ll also see a letter grade for each credit score factor, along with suggestions for improving it. Those Credit Sesame benefits are free.
The entire cleanup process may take a few days or a few months, so be patient. Raising the FICO score isn’t important at this stage for job seekers because while potential employers do see your credit history, they don’t see your score.
If your spouse recently lost his or her job and that resulted in missed payments or even a foreclosure, or if you are the victim of identity theft, disclose those circumstances when the employer asks for written permission to pull your credit report. Problems with credit are common, and being up front about the situation prevents the negative effect of a surprisingly bad credit report.
Be proactive and in charge of your credit story. You’ll go a long way toward showing the hiring company a level of maturity and responsibility they may not often see.
After the initial conversation, move on. The company is interested in so much more than the contents of your credit report. Job seekers who are a good fit for the job may find that the credit report has much less of an impact on the hiring process than the many other qualification factors an applicant can show.