How Does a Credit Check for Employment Work?

Lenders use your credit in order to determine how you will behave as a borrower and employers also use this information to gain valuable insight into how you will be as an employee. This is why a credit check for employment is a valuable tool.

How Do Employers Use Credit Checks?

There are certain things employers are looking for when looking at credit checks for employment in order to determine if a potential candidate is the right person for the job.

Handling Money History: One of the main reasons why employers check credit reports of candidates is to make sure that their money is going to be in good hands. It’s common for employers to check credit reports if someone is applying for a position that requires handling money on behalf of the company or clients, such as with a brokerage or bank. Employers look at credit as a safety measure to make sure they find out as much information about a candidate as possible. If you have a history of mismanaging money, and this shows in your credit report, then you might mismanage the company’s money. If this happens then the company could be sued by its shareholders.

Decision-Making Ability: Even if the job doesn’t involve handling money, any negative items on a credit report can be a red flag. Multiple bank accounts closing, liens, or foreclosures can be signs of negligence and irresponsibility. Major money problems in your personal life could mean you don’t have the judgment or decision-making skills in order to succeed at the job. It’s not just derogatory items that could mean you don’t get the job. Less serious things, such as a history of late fees or a high credit utilization ratio, could mean that you have trouble with your finances or a hard time budgeting. These things can worry employers that this negligence could also affect your job performance.

Potential for Criminal Activity: Applicants that do have major bad remarks on their credit report are considered more at risk for criminal behaviors. Some companies are worried that those with large debts could be more likely to steal from the company if hired. Although most people may not consider committing fraud in order to pay for their own financial issues, employers might not be willing to take this chance.

What Can an Employer Do with Credit Information?

Even though employers are able to access this information, there are some laws about what can and can’t be done with the information. This means potential candidates can’t be treated unfairly in the application process because of the credit profile.

The Info Can’t Be Used in Some States: Even though many employers consider credit reports when making a hiring decision, some states won’t allow them to do so by law.

They Get Limited Information: Employers get different information on a credit report than lenders do. There is a modified version of your credit report that doesn’t have personal information that could be used to discriminate against you, such as your birth date.

It Doesn’t Affect Credit: When a lender checks your credit when you apply for a loan, it’s known as a hard inquiry and this does take a few points off the credit score. However, when employers look at a credit report then it’s a soft inquiry and there is no impact on the score.

Employers Don’t See a Credit Score: Credit scores aren’t found on the credit report, and it’s a separate process. This means when an employer checks credit, there is only a modified report and not the score.

Candidates Need to Give Consent: A prospective employee needs to give consent and have written authorization before the employer is allowed to pull the credit report.

Bankruptcy Doesn’t Count: Employers can’t discriminate against any candidates who have filed for bankruptcy. Unfortunately, those who have usually gone through bankruptcy do have other negative items on a credit report that could be used against them.

Candidates Need to Be Notified if Credit Information Was Considered in the Hiring Process: If employers do review the credit report as part of the process and disqualify a candidate, they are also required to explain why and how that decision was made.