How Employment Credit Checks Work
It's the big day -- you dress to impress, print extra copies of your resume and don a winning smile. Unfortunately, you might be destined to fail before you ever walk into that job interview, despite your rock-solid qualifications.
A recent survey by CareerBuilder found that 72 percent of employers conduct background checks on prospective employees and include a credit check in 29 percent of cases. That means if you have a dark financial past, it could come back to haunt you during the job application process.
What Are Employers Looking for in Your Credit Report?
Just as lenders review your credit report in order to glean some idea of how you will behave as a borrower, employers also review credit reports of prospective employees.
[Read: The Best Credit Cards for Bad Credit of 2017.]
Credit reports, which detail your history of borrowing and paying back money, can shed some light on how you will perform as an employee. At least, that's what many employers believe. Here's what they're looking for.
History Handling Money
One of the biggest reasons employers will check credit reports of a prospective employee is to be sure their money is in good hands. It's not uncommon for employers to check your credit report if you're applying for a position that requires you to handle large amounts of money on behalf of the company or its clients, such as with a bank or brokerage.
"Generally, employers want to look at your credit as a safety measure, and as proof that they tried to find out as much as possible about your background before they hired you," says Jeff White, financial analyst and staff writer for Fit Small Business, a site that provides financial advice to small businesses. White explains that if you have a history of mismanaging money in your credit report and then mismanage the company's money, the company could be sued for negligent hiring by shareholders.
Decision-Making Ability
Even if you aren't handling finances as part of your job, negative items on your credit report are still a red flag to employers.
"Foreclosures, multiple bank account closings or liens against the job candidate could be interpreted as signs of irresponsibility and negligence," says Peter Yang, co-founder of ResumeGo, a company that offers career coaching and resume-writing services. An employer might interpret major money problems at home to mean you lack the decision-making skills and judgment to excel in your job.
And it's not just major derogatory items that can work against you. Even seemingly less serious items, such as a high credit utilization rate or a history of late fees, could indicate you have difficulty budgeting and managing your personal finances, according to Yang. In turn, employers might worry that negligence will creep into your work life, too.
Potential for Criminal Activity
Applicants who have major derogatory marks on their credit reports could be considered a risk for criminal behavior. "Some companies might even suspect that someone with large debts might be more likely to steal from the firm if hired," says Yang.
[Read: The Best Student Credit Cards of 2017.]
Although you might never consider embezzling or committing fraud to alleviate your own financial issues, some employers aren't willing to chance it.
The Law: What Employers Can and Can't Do With Your Credit Information
Before you panic about potential employers accessing your personal credit information, know that the law is on your side. There are a number of rules in place to ensure you aren't treated unfairly during the application process due to your credit profile.
-- Credit information can't be considered in some states. Although many employers do consider credit reports when making hiring decisions, a significant portion are not allowed to do so by law. Several states restrict or prohibit the practice in most circumstances, including California, Connecticut, Illinois and Maryland, according to the National Conference of State Legislatures.
-- Employers receive limited information. When employers pull your credit report, they don't see the same information that lenders do. Rather, they receive a modified version of your credit report that omits personal information that could be used to discriminate against potential candidates, such as your birth year.
-- It won't affect your credit. When you apply for a credit card or loan, the lender will check your credit before deciding whether to approve you. This is known as a hard inquiry and will temporarily knock a few points off your credit score. When a prospective employer pulls your credit, it's considered a soft inquiry, meaning it has no impact on your score at all -- the same as when you check your own credit.
-- They can't see your credit score. Credit scores are not actually found on your credit reports. The process for checking your credit score is different and separate from checking your reports. That means when employers check your credit, they will only be able to see your modified report and not your score.
-- You must give consent. Thanks to the Fair Credit Reporting Act, prospective employers are required to notify you in writing that a credit check is part of the application process. You must also give written authorization before they're allowed to pull your credit report.
-- Bankruptcy doesn't count. Employers are not allowed to discriminate against applicants who have filed for bankruptcy. While this is certainly good news, the unfortunate reality is those who've gone through bankruptcy probably have additional negative items on their reports.
-- You must be notified if your credit information was used in the hiring decision. If prospective employers do review your credit report as part of the hiring process and you are disqualified due to information in your file, they are required to explain how and why that decision was made. You should be provided a copy of your credit report, an explanation of your rights under the law and the contact information for the company that was used to pull your report, in case you want to dispute any information.
Don't Let Your Credit Hold You Back From a Job
Maintaining excellent credit is no small feat for most people, but the good news is you don't have to in order to get your dream job. There are a few steps you can take to prepare for a potential credit check, even if your credit report is far from perfect.
-- Check your credit report. This is the first step is knowing what, exactly, is on your credit report. You're entitled to view your credit reports from each of the three major credit bureaus once a year at AnnualCreditReport.com, the only site federally authorized to provide official reports for free. "Take advantage of this to both fix any mistakes on your report and prepare a reasonable explanation justifying each of the issues in case you are asked about them," recommends Yang.
-- Grant permission. Although companies are legally required to get your permission before checking your credit, opting out of this process will likely disqualify you from the position. It's better to give your consent and prepare to explain your situation rather than take yourself out of the running from the start.
-- Add a statement of dispute. This 100-word statement is a chance for you to share your side of the story when it comes to negative entries on your report that you believe to be incorrect or that you simply want to explain. There's no guarantee that employers (or lenders) will consider the statement, but it does give you a chance to address the problem directly in your report.
-- Have an explanation ready. When you do make it to the interview stage, be prepared to discuss your credit. If you know there are potentially troubling entries, have your explanation prepared. Remain calm, acknowledge the seriousness of the situation and present your case clearly. Often, employers will overlook a credit issue if they're convinced it isn't indicative of a larger issue that could impact your job performance.
-- Avoid the big guys. Finally, if you're searching for a job when you have poor credit, consider applying to companies that are less likely to make credit checks part of their hiring process. "People with low credit scores and many negative items on their reports might do well networking and targeting smaller companies to increase their chances of getting hired," says Howard Dvorkin, certified public accountant and chairman of Debt.com.
It might not seem fair that your personal finances could be used against you when job searching. After all, it's hard enough to land a job with a clean slate. If you've been out of work for an extended period, there's an even greater chance you will have some credit issues on your record.
[Read: The Best Cash Back Credit Cards of 2017.]
"With the recent recession, credit reports and scores don't always paint a clear picture," notes Dvorkin. In many cases, employers will understand that, too. Bad credit doesn't have to be a death sentence for your career. Take steps to clean up your credit report as much as possible before applying for jobs, and prepare to state your case if credit issues do come up.
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