Sometimes employers approach background checks in different ways. In some cases, credit reports are included. A job background check may include a credit check in certain industries, such as banking and security. The size of the company can be a factor, too: Large corporations are more likely to conduct a credit check than a small family business.
We’ll walk through the specifics of when an employment background check may include a credit check, why potential employers want this information, and what financial data they have access to.
What Are Credit Checks?
A credit check is a request to see your financial data as collected by one of the three major credit reporting bureaus. Credit reports contain information about past and existing credit accounts, payment patterns, and how much debt you’re carrying.
According to the Fair Credit Reporting Act (FCRA), only certain individuals and organizations have the right to check credit histories, such as lenders, insurance agents, and landlords. Potential employers can also conduct a credit check for employment purposes, with your permission.
Sometimes credit checks are conducted to confirm a consumer’s identity — and head off identity fraud — rather than to investigate your financial history. For instance, banks may run a limited credit check on customers looking to open a checking account.
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Credit Check vs Background Check
A background check contains identification verification information along with data from criminal records, educational and employment backgrounds, civil records, driving history, and more. In some instances, a background check may also contain a credit check.
The Importance of Good Credit
A good credit history primarily makes it easier to get approved for a loan, and to qualify for better interest rates and loan terms. The higher the score, the less someone will pay in interest over their lifetime, potentially saving them thousands of dollars.
Good credit can also help renters qualify for an apartment. In some cities, renters routinely provide a credit reference with their rental application. While there’s no minimum credit score needed to rent an apartment, a strong credit history shows landlords that you’re someone who pays their bills on time.
Employers may also check your credit if you’ve applied for a job. Having good credit without any red flags can make the hiring process go more smoothly. However, some cities and many states have banned this protocol or put limits on it.
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Why Employers Look at Your Credit Score
An employer may run a credit check on a job applicant whom they’re seriously considering hiring. Employer credit checks are more common in industries where employees handle money or have access to customers’ financial data.
By conducting credit checks, businesses hope to confirm that an applicant demonstrates financial responsibility and doesn’t pose a security risk to the company, other employees, or customers.
Responsibility
A credit report shows how responsibly an applicant has handled their own money. If there are any red flags, the employer may not want to hire that person to handle company funds or take on other important responsibilities.
Security
A credit report can be used to verify your identity along with other pieces of background information. If there are discrepancies that can’t be easily cleared up, that’s a red flag.
What a Credit Report May Tell an Employer
The information in a credit report can include employment history as well as red flags such as late payments, debts sent to collections, foreclosures, liens, lawsuits, and judgments.
Employment History
Your complete employment history is not included in a credit report. Past and current employers may appear on your credit report, but only if you listed them on a loan or credit card application. Typically, if a lender wants your employment history, they will ask you for it directly.
Late Payments
Credit reports contain information about current and historical credit accounts, including installment loans (mortgages, car loans, personal loans) and revolving credit (credit cards and lines of credit). The reports typically contain information from the past seven to ten years, including a person’s payment history and whether credit accounts are paid up to date or are past due.
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Debt Collection
Once someone is behind on payments — at least 120 days — the lender may send the account to a collections agency. These agencies attempt to collect on the bill. This can have a significant impact on your credit score, since making payments on time is the biggest factor in the algorithm that determines your credit score.
Debt Charge-Off
If a company you owe money decides they can’t collect the funds, they can “charge off” the amount as uncollectible. This may stay on your credit report for seven years, starting with the delinquency date that ultimately led to the charge-off. A debt charge-off typically lowers the person’s credit score even more than going to collections.
Foreclosures
When a homeowner misses multiple mortgage payments, the lender may take possession of the home, or “foreclose” upon it. This remains on a credit report for seven years, starting with the first missed payment that ultimately led to the foreclosure. This can significantly reduce someone’s credit score — although the impact may diminish over time — and can be a red flag for employers.
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Liens
A tax lien is a claim that you owe money for taxes, usually federal, state, or property tax. Tax liens no longer appear on credit reports by the three major credit bureaus, and they can’t affect your credit. They are, however, available on public records. If an employer conducts a full background check, they can still receive this information.
Lawsuits and Judgments
Just like tax liens, judgments from lawsuits are not included in credit reports or factored into a credit score. An employer that conducts a background check, though, will likely receive this information because it’s part of public records.
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How to Prepare for an Employer Credit Check
Every consumer should be aware of what information is available on their credit report. You can request your credit report and find out your credit score for free at AnnualCreditReport.com.
Review your report for errors. Even small typos — like misspelling your name — could present problems down the line. Report them to the relevant credit bureaus via their online dispute process to have them corrected or removed.
You may also consider signing up for a credit monitoring service. What qualifies as credit monitoring varies from company to company. Look for a service that sends customers alerts whenever their credit score changes, accounts are opened or closed, and red flags appear on their credit history.
If you’ve had financial problems in the past but have turned things around, be prepared to explain to your potential employer how you’ve accomplished that.
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Credit Check Limitations
Credit reports contain a lot of private financial information. However, you can feel secure knowing that there are strict limits to what can be included. The following information cannot appear on your credit report:
• Account balances for checking, savings, and investments
• Records of purchases made
• Income information
• Judgments and tax liens
• Medical information (physical and mental), although money owed to a doctor or hospital can appear
• Marital status
• Disabilities
• Race and ethnicity
• Religious affiliations
• Political affiliations
Does an Employer Credit Check Hurt Your Credit Score?
No. Employers conduct what is known as a “soft credit inquiry” or soft pull. Because the credit check isn’t the result of applying for a new loan or credit card, the request probably won’t appear on your credit report and it won’t affect your score.
What Are Your Legal Rights as a Job Applicant?
According to federal law, job applicants have the right to:
• know what is in their file
• ask for a credit score
• dispute incorrect or incomplete information
• be told if information in the file is used against them
An employer or potential employer must get written consent before they can request credit report information (the trucking industry is an exception). Some cities and many states have banned or put limits on an employer’s ability to check your credit report.
The Takeaway
Employers may run credit checks on applicants as part of the hiring process. By conducting credit checks, businesses hope to confirm that an applicant demonstrates financial responsibility and doesn’t pose a security risk to the company, other employees, and customers. Credit checks are more common at large corporations and in industries where employees handle money or have access to customers’ financial data. You can prepare for an employer credit check by requesting your report and correcting any errors.
SoFi is a mobile money tracker app that monitors all of your money, all in one place. Plus, you’ll receive free credit monitoring, spending breakdowns, and financial insights. Because SoFi credit monitoring involves only a soft pull, it won’t affect your credit score.
FAQ
Why do background checks include credit reports?
Information found in a credit report can give the employer a sense of the job applicant’s financial stability. This may be especially important if the job involves handling money, financial data, or pharmaceuticals. Some industries that routinely pull credit checks on applicants include banking, retail, insurance, public safety, and security.
Does a background check include a hard credit check?
No. A background check with credit check involves a soft inquiry, so it won’t affect your credit score.
What causes a red flag on a background check?
Criminal records, suspicious credit histories, inconsistencies in information provided, and gaps in employment history can be considered red flags.
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