Your financial history may play a more important role in today’s job market than you may think it would. Several employers now include credit checks as part of the hiring process. The practice has been on the rise recently and cuts across many job seekers in various industries. But why do employers care about your credit? How does this process work? And what does that mean for you as a job applicant?
Credit checks by employers are about to go under the microscope. We shall discuss the ‘why’, the ‘how’, and its effects on employers and job seekers. From a job applicant who is worried about his or her credit history to an employer considering running credit checks, this all-encompassing guide has something important to offer.
What is an Employer Credit Check?
Before we go any further, let’s explain just what an employer credit check entails.
An employer credit check is a review of a job applicant’s credit history. Although similar to the check a bank may run when you apply for a loan, there is one key difference: if an employer runs a credit check, they do not see your credit score but, rather, a modified version of your credit report.
This typically includes things like:
- Your name, address, and Social Security number
- Current and former employers
- Open credit accounts, including the current balances
- History of credit account payments
- Collections accounts
- Bankruptcies, foreclosures, or tax liens
It is important to note that employer credit checks are “soft inquiries.” They do not ding your credit score as they would if you apply for a new credit card or loan.
Why Do Employers Use Credit Checks?
You may be wondering why your credit history should be of any concern to the employer. The reasons why credit checks become a part of the recruitment process in some companies are many:
1. Financial Responsibility
Employers may use an applicant’s credit history to indicate general responsibility and trustworthiness. A history of timely payments and well-handled debt may indicate that an applicant is organized and reliable.
2. Theft and Embezzlement
For jobs involving money or access to sensitive monetary information, employers conduct credit checks to estimate the likelihood of possible theft or embezzlement. It is based on the assumption that any person in a position experiencing extreme monetary difficulties could easily be tempted to steal money.
3. Verification of Information
Credit reports enable the employer to verify an applicant’s information, such as past addresses and previous employers.
4. Conformity with Industrial Regulations
Credit checks may be legally or regulatory required for some sectors, like finance and government.
5. Predicting Job Performance
Some employers use credit history to indicate job performance, considering financial jobs in particular. This link is moot, though, and not established with certainty.
The Legal Framework: FCRA and Beyond
Credit checks by employers do not occur in a legal vacuum; that is, there is legislation and, importantly, the Fair Credit Reporting Act that regulates this practice.
The FCRA laid down certain requirements that an employer should fulfill when using credit checks:
- In Writing: The employer shall obtain written consent from the applicant before conducting a credit check.
- Pre-Adverse Action Notice: If an employer intends not to hire because of something in the credit report, it must send a “pre-adverse action disclosure,” which includes a copy of the credit report and a document entitled “A Summary of Your Rights Under the Fair Credit Reporting Act.”
- Adverse Action Notice: If the employer intends to take adverse action by failing to hire the applicant, then notice must be provided with contact information for the company that provided the report.
- Equal Application: The FCRA requires that credit checks apply uniformly to all applicants for any position.
Apart from the FCRA, many states and cities have made similar moves through statutes limiting credit checks for employment purposes. For example, California, Colorado, Connecticut, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont, and Washington have laws on this practice. New York City prohibited credit checks for most jobs.
Credit Check: What Goes Behind the Scene?
Knowing exactly how employer credit checks work can demystify this practice. Here’s a breakdown of what this process is like, step by step:
- Application for Employment: This process initiates when you apply for a job.
- Request for Consent: If the employer intends to conduct a credit check, they will request your written permission. This would likely come after an initial interview or if you are in serious consideration for the position.
- Information Gathering: The employer needs your full name, address, and Social Security number in order to request the report.
- Report Request: The employer contacts one of these credit reporting agencies, Equifax, Experian, or TransUnion, to request your report.
- Report Generation: The credit reporting agency produces a special employment credit report.
- Employer Review: The employer will review the report for their overall application evaluation.
- Decision Making: The employer takes the information with other factors to decide.
- Notification: If the credit report is one that led to a decision not to hire you, the employer must notify you and give you a copy of the report.
What Do Employers Look for in a Credit Check?
For reviewing credit reports, employers normally look out for several main areas:
Payment History
Employers can check whether you pay your bills on a regular basis and on time. Late payments may be considered a problem, especially if numerous or recent.
Debt Levels
Heavy debt, especially credit card debt, can be a source of concern for some employers. They may worry about diminished job performance because of financial pressure or even an increased likelihood of theft.
Bankruptcies and Foreclosures
Large negative events, such as bankruptcies or foreclosures, may garner attention. However, these must be taken into consideration by employers in terms of recency and any mitigating circumstances.
Accounts in Collections
If multiple of your accounts have gone into collections, it may show financial difficulties to an employer.
Overall Financial Stability
Employers may look at the bigger picture of your credit history. A general sense of responsibility regarding credit may help your cause, even if your record has some scratches and dings.
Industries That Commonly Use Credit Checks
Although any employer can conceptually use credit checks, some industries are more apt to use them:
- Financial Services: Banks, investment firms, and insurance companies are typical clients of credit reports, especially for jobs working with money or offering financial counsel.
- Government and Public Service: Most government agencies, especially those requiring security clearances, have credit checks as part of their employment process.
- Retail: Jobs that involve cash handling or management may require a credit check.
- Law Enforcement: Police departments and other law enforcement agencies sometimes perform credit checks as part of broader background checks.
- Healthcare: Some healthcare positions, particularly those involving pharmaceuticals or patients’ finances, may also involve credit checks.
- Casino and Gaming: Credit checks also form part of this industry sector due to the volume of cash handling.
Pros and Cons of Employer Credit Checks
Like everything else in life, there’s a negative side to employer credit checks as much as there’s a positive one. Let’s look at each side:
Pros
- Risk Reduction: Credit checks can help employers avoid hiring someone who may create financial risks within the organization.
- Verification Tool: Credit reports are also used for verification of information provided by applicants, like past addresses and previous employers.
- Regulatory Compliance: Credit checks help companies follow legal or regulatory requirements in many industries.
- Revelation of Financial Responsibility: Regarding the positions concerning finance, credit checks may provide information relevant to personal finance management for a candidate.
Cons
- Invasion of Privacy: To many, it is an invasion of privacy to require credit checks from candidates.
- Potential for Discrimination: Credit checks have the potential to affect certain groups disproportionately and, as such, may lead to discrimination in hiring.
- Limited Relevance: In most cases, a candidate’s credit history would have little relevance to their ability to perform the job satisfactorily.
- Information may be Outdated or Inaccurate: Credit reports sometimes contain errors and/or may not indicate a person’s current financial state.
- Qualified Applicants May Not Apply: Some applicants may never apply for a particular job because they know there will be a requirement for a credit check.
Impact on Job Seekers: What You Need to Know
If you’re a job seeker, knowledge of employer credit checks will help you better navigate the job market. Bear in mind the following:
Know Your Rights
Remember that an employer must get your written consent to conduct a credit check. If you are denied employment based on your credit report, you legally have the right to access the report and dispute any inaccuracies.
Be Proactive
Before applying, request a copy of your credit report and correct any inaccuracies. You may have one free credit report annually from each of the three major credit reporting agencies.
Anticipate Explaining
If you have negative entries on your credit report, take a moment to explain those items to your potential employer. Most employers will listen if you can put financial hardship into context.
Consider Applicability
If you discover an employer planning to request your credit report for employment in a position for which access does not seem pertinent, you may wish to ask for an explanation behind the request. Some states mandate that employers establish how credit information is substantially related to job functions.
Focus on Improvement
If your credit isn’t looking so hot, work on improving things. Small positive changes, over time, make a big difference.
Best Practices for Employers
Although some may give reasons why credit checks should be considered, here are a few best practices for those employers considering or currently using them:
- Establish Clear Policies: In writing, detail when and how credit checks will be used in the hiring process.
- Ensure Relevance: Use credit checks only for those positions where credit history will relate to job duties.
- Apply Consistently: Credit checks applied to one applicant for a certain position should be extended to others applying for the same position.
- Provide Context: Allow applicants to explain their negative credit report items before making hiring decisions.
- Stay Informed: Know the changing laws and regulations regarding credit checks when hiring.
- Consider Alternatives: In some positions, other screening methods may be more relevant and less potentially discriminatory than credit checks.
Future of Employer Credit Checks
The use of credit checks for hiring is the subject of much debate. With growing concerns about privacy and potential discrimination, we can expect some changes in the future in this practice:
- Increased Regulation: More states and cities may pass laws that limit how credit checks can be used in hiring.
- Alternative Assessment Methods: Employers will likely continue searching for alternative approaches for assessing applicants’ financial responsibility and trustworthiness.
- More Transparency: Greater transparency in how credit information is used in hiring decisions will likely continue to be pushed for.
- Technological Improvement: New technologies could make alternative verification and risk assessment methods available for applicants.
Conclusion
Checks of employer credit present a very complex and sometimes controversial part of modern hiring in a way that they can provide useful information that will be important to certain positions. Still, on the other hand, they seriously raise concerns about privacy and fairness.
For job seekers, this briefing will help you prepare for your job search and know your rights. For employers, carefully considering when and how to use credit checks can help balance risk management with fair hiring practices.
Credit checks will continue changing with the evolution of the job market and new regulations; hence, an employer or employee needs to stay in a position of knowing current developments in the job market.
The bottom line is that your credit history is important but a piece of the puzzle. Whether an employer or an employee, the whole picture needs to be considered when making decisions on employment. The objective here is to understand how credit checks fit into hiring practices so that we can work toward a job market that is not only secure but also fair to all.
