The process of looking for a job is complex, as is the hiring process that can follow. You may be psyched to be offered a position but then learn that a credit check is part of the vetting.
This step can be concerning for some prospective employees, as it makes them wonder why their financial history matters, how their credit will look, and whether it could be considered a strike against them.
Not all companies run credit checks, but if you are negotiating with one that does, here are answers to your questions about this procedure, including:
• What is a credit check for employment?
• Why do employers check credit?
• What are employers looking for when they check credit?
• What requirements and limitations govern credit checks?
What’s a Credit Check for Employment?
Pre-employment credit checks happen when a company uses a third-party company to check a candidate’s credit history and see their past approach to consumer debt.
Sometimes, what’s called a background check may include a credit check as well as a scan for criminal activity and is a tool that helps the potential employer make a decision about whether or not to hire the candidate.
Credit checks are more commonly used in industries that deal directly with money, like accounting, banking, and investing, but any employer could decide to run pre-employment credit checks.
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How Does a Pre-Employment Credit Check Work?
Here’s how a pre-employment credit check works: Once the job offer is on the table, an employer will solicit a third-party provider to run a credit check for employment purposes that features the following information about the potential employee:
• Full name and previous names
• Current address and past addresses
• Social Security number
• Incurred debts such as credit card debt, car loans, mortgages, student loans, and personal loans, including the full payment history on each account and any late payments.
One thing pre-employment credit checks cannot include is the potential employee’s date of birth because it could allow their age to be used against them in a discriminatory manner.
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What Do Employers See on Credit Checks?
You’re likely curious to know exactly what a prospective employer could see when they peek at your credit. Here’s the answer.
What They See
A potential employer will only see some aspects of your credit report. Typically, they will access:
• Your name and address
• Your payment history
• What credit accounts you hold and your available credit
• Information on your work history that you have reported
• Any bankruptcies or liens.
What They Don’t See
Next, consider what they don’t see when accessing your data as part of a credit check:
• Your credit score
• Your income
• The account numbers connected to your credit accounts
• Medical bills
• Details such as your age, marital status, race, or ethnicity. These are protected as part of discrimination protection (more on that in a moment).
And also worth noting: There is a seven-year restriction on certain kinds of background information for positions that pay less than $75,000 per year, including that relating to bankruptcy and liens.
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Federal Limits on Pre-Employment Credit Checks
The Federal Trade Commission’s Fair Credit Reporting Act (FCRA) is federal legislation that protects the personal information collected by consumer reporting agencies and ensures that any entity that uses the information notifies the consumer of adverse actions taken on the basis of the report.
Here are a few of the FCRA requirements for employers who run a background credit check for employment on potential or current employees:
• Employers cannot legally obtain background information on an employee “based on a person’s race, national origin, color, sex, religion, disability, genetic information (including family medical history), or age (40 or older).”
• Employers must inform employees in writing of their intention to perform a background check or credit check, indicating they might use the information to make decisions about their employment.
• Employers must then get written approval from the applicant or employee to perform the background check and certify to the third-party provider that the employer:
◦ Notified the applicant and received their permission to obtain a background report.
◦ Fully complied with FCRA requirements.
◦ Will refrain from discriminating against the applicant or employee or misusing the information as a violation against Equal Opportunity laws or regulations.
• Before taking any adverse employment actions against an applicant or employee, employers must provide them with a notice that includes a copy of the report itself and a copy of A Summary of Your Rights Under the Fair Credit Reporting Act.
• After taking any adverse employment action, the employer must inform the applicant or employee:
◦ Of the name, address, and phone number of the company that conducted the background check, and the fact that it did not make the final decision.
◦ That they were rejected because of information in the report.
◦ That they reserve the right to dispute the report’s accuracy or completeness and receive a free report from the same reporting company within 60 days.
State and Local Limits on Pre-Employment Credit Checks
For the most part, many US states allow employers to obtain credit reports in the hiring process in a fair and equitable way. Certain states, however, restrict how the obtained information can be used. Those states include California, Colorado, Connecticut, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont, and Washington, as well as the District of Columbia. Delaware has a law that prohibits these checks by public employers until an applicant has been offered a job conditionally.
Several other states have legislation pending that could prohibit or place restrictions on credit inquiries for employment.
Certain localities also have prohibitions and restrictions on pre-employment credit checks, including New York City, Philadelphia, and Chicago.
What Are Employers Looking for in Your Credit Report?
So, if they’re digging deep into your credit history to determine whether or not to hire you, what exactly are employers looking for in a credit report? Here are a few things that could help them with their hiring decision:
History of Handling Money
Particularly in cases where a potential employee would be handling large amounts of money on behalf of a company’s clients (like an investment broker or a banker), a pre-employment credit check can help ensure trustworthiness and the ability to keep their funds safe and secure.
If there’s a history of mismanaging money in a credit report, it can be seen as a red flag for potential employers who are concerned the candidate would mismanage the business’s money.
Decision-Making Ability
Even in cases where a potential employee isn’t directly handling money, certain dings in their credit history can still signal a red flag to employers. Negative credit events like foreclosures, numerous bank account closings, late payments, high credit utilization rate, or liens against a job applicant can be seen as signs of negligence or carelessness that they don’t necessarily want in their workforce.
Potential for Criminal Activity
Another reason for running a background credit check for employment is to assess whether a job candidate could be a risk for criminal behavior. For example, if a potential employee has several large debts, it could leave the employer wondering whether they’d be tempted to embezzle or commit fraud to cover their own debts and financial issues.
Recommended: How to Check Your Credit Score for Free
Anticipating an Employer Credit Check
Being prepared in advance of an employer credit check can sometimes be half the battle.
Here are a few steps you can take before the job interview even begins:
1. Obtain a copy of your credit report as soon as you can. Wondering how to review your file? You’re entitled to one free copy of your credit report per year from all three of the major credit bureaus (Equifax, Experian, and TransUnion).
You can get it by visiting AnnualCreditReport.com . Allow plenty of time to look into any errors and file disputes, if necessary.
2. Address any errors on your credit report. If you notice any discrepancies when you pull up your free credit report, you can provide a brief statement to dispute the findings and get on top of it before the potential employer sees it. You can also write statements that explain the cause for a discrepancy like a late payment. For example, perhaps you were late on a mortgage payment because of a disability or illness.
3. Provide your written permission for the employer to run the credit check. This way, you’re fully prepared for the next step in the hiring process and have done everything you can to put your best foot forward.
Does an Employer Credit Check Hurt Your Credit?
You may wonder, Can an employer background check affect your credit score? Typically, the answer is no. These kinds of inquiries are known as a soft pull versus a hard pull. It won’t take points off your credit score the way a deeper inquiry (from, say, a credit card company you applied to) could.
Why Employer Credit Checks Are Controversial
Some employers may feel that credit checks provide them with additional important information on a candidate before they make a hire.
However, the controversy around employer credit checks is this: Others would say that a credit report has no impact on a person’s ability to do most jobs.
They also feel that delving into a credit report could reflect negatively on minority job seekers and others who may not have as positive credit history. In this way, accessing credit information could contribute to discrimination.
The Takeaway
A credit check for employment purposes can throw you for a real loop in the job interview process. If you’re prepared for an employment credit check in advance, there’s a good chance you can present your case in a clear and compelling manner that resonates with the employer.
Checking your credit reports is the first step to knowing what information a potential employer might access. After that, handling your finances responsibly with the right banking partner can help get you on the right track.
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FAQ
What do employers look for when doing credit checks?
When an employer does a credit check, it is typically to assess how reliably a candidate handles financial responsibilities, decision-making ability, and possible propensity towards money-related crimes.
Why is an employer asking for a credit check?
An employer may ask for a credit as a way of gaining more insight into your financial habits and how well you make decisions. If they see high levels of debt and late payments, they might think twice about your abilities, especially in a financial position.
Can a job offer be rescinded due to bad credit?
It is legal in many states for a job offer to be rescinded after a credit check. Your prospective employer might see too many signals that your have poor decision-making and money-management skills.
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