Why Employers Check Credit and What They See

Anyone who has applied for a job has likely gone through a background check before getting an offer. But what about a credit check?

Some organizations perform a credit check for employment to get insight into a potential hire's financial history, especially if the applicant will be handling the company's finances or accessing private consumer data. However, this practice is seen as controversial by some who say that it harms people who are building their credit or recovering from a financial misstep and are seeking a new job to get ahead.

Employers don't get a credit score during this process, and thus there is no minimum credit score for employment. Rather, potential employers are assessing an applicant's financial behaviors by reviewing a modified version of their credit report that includes credit accounts, payment history, debts, bankruptcies or liens, and certain work history.

Here's what else you need to know about a hiring credit check, including whether it hurts your score, what rights you have and how to prepare for the process.

Why do employers check credit?

The goal of a credit check from an employer's perspective is to protect the company's finances, workers and customers by hiring someone trustworthy — and they believe a credit check provides some key insight into a person's character.

An applicant's credit history can flag potential problems an employer would want to avoid:

• Lots of late payments could indicate you’re not very organized and responsible, or don’t live up to agreements.

• Using lots of available credit or having excessive debt are markers of financial distress, which may be viewed as increasing the likelihood of theft or fraud.

• Any evidence of mishandling your own finances could indicate a poor fit for a job that involves being responsible for company money or consumer information.

The Professional Background Screeners and HR.com's survey of human resources professionals in 2021 found that credit or financial checks are included in 51% of employer background screenings for companies with U.S. locations. ^[0]

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What do employers see in a hiring credit check?

Potential employers see a modified version of your credit report, says Rod Griffin, senior director of public education and advocacy for Experian.

Does an employer credit check hurt your score?

The credit check counts as a soft inquiry on your credit, so it won’t take points off your credit score, the way a credit card application might.

The credit report also won’t show other soft inquiries on your credit, so potential employers won’t be able to see if other employers have checked on you. But you will be able to see the soft inquiries if you request your own credit report.

Businesses may get an employer credit report from one of the three major credit reporting bureaus — Equifax, Experian and TransUnion — or may use a specialty screening company.

What are your legal rights?

You can be denied a job because of your credit, but you do have rights, thanks to the Fair Credit Reporting Act. Here are the steps employers must take, as required by this law:

Notification and permission: An employer must notify you if it intends to check your credit and must get your written permission. The Fair Credit Reporting Act requires the notice to be “clear and conspicuous” and not mixed in with other language.

Warning before rejection: If an employer might reject you based somewhat or totally on your credit report, it must tell you before the decision is made. It has to send you a “pre-adverse action notice,” including a copy of the report used and a summary of your rights.

Time to respond: The employer must wait a reasonable period — usually three to five business days — before it proceeds. The goal is to let you explain the red flags on the report, or, if the negative information is incorrect, let you fix the mistakes with the reporting company.

Final notice, right to free copy: After it acts, the employer must follow up with a post-adverse action notice, giving the name of the credit report agency, its contact information and explaining your right to get a free copy of the report within 60 days.

Controversy around employer credit checks

Those who object to employer credit checks say that a worker's credit report has no bearing on their ability to perform most jobs. Moreover, critics say the practice harms workers — especially minority job seekers — because it can be an obstacle on the path toward economic stability.

"There are some significant racial disparities in credit history and credit scores," says Chi Chi Wu, a senior attorney at the National Consumer Law Center. "Studies show that Black and Latino consumers have lower credit scores as a group," she notes, citing reasons like the racial wealth gap and other forms of discrimination that make debt harder to pay off and easier to accrue.

As a result, some states have limited the use of employer credit checks. You can check with your state labor department or your city government to learn whether employer credit checks are restricted in your area.

Those in favor say that credit checks offer employers information into a potential job candidate's judgment and decision-making that could impact their business in the future.

How to prepare for a hiring credit check

Checking your own credit proactively lets you see what an employer would — and potentially fix any erroneous negative marks in advance.

You’re entitled to one free credit report every week from each of the three bureaus by using AnnualCreditReport.com. If you spot errors, get them corrected through a dispute process.

Once you’ve done that, keeping your credit report in good condition is a smart financial move — and it will protect your credit score, too. Here’s how:

• Pay all bills on time. Payment history has the single biggest influence on your credit scores, so making on-time payments helps your scores while also keeping delinquent marks off your report.

• Use available credit lightly. Experts say it’s best to use less than 30% of your available credit on any card at any time — and lower is better. That shows you’re not overextended financially and also helps your scores because credit usage has the second-biggest influence on them.

• Monitor your credit report regularly. Some personal finance websites, such as NerdWallet, offer a free credit report and score that you can check whenever you like — giving you a way to regularly watch for negative marks.

• Temporarily lift your credit freeze. If you have a credit freeze with the major credit bureaus and know a potential employer is going to check your credit, it’s a good idea to temporarily lift the freeze. If not, the freeze could slow down the hiring process.

• Prepare an explanation of negative information in your credit reports. Even something as small as a missed payment could be a red flag to potential employers. By preparing a statement ahead of time explaining any derogatory marks in greater detail — for example, how a previous job loss led to a late payment — you’ll show the hiring managers that you are taking responsibility for your financial actions.