Credit checks for employment: What do employers look for?

Employment credit checks could determine whether you get the job you’ve been looking for. About half of U.S. employers use credit checks, so understanding how your credit might affect your employability is critical if you’re looking for a new role. Read on to find out what credit checks for employment include, what employers look for, and how to prepare.

What is an employment credit check?

An employment credit check examines your credit history to assess your financial responsibility, which could impact an employer’s perception of your trustworthiness and reliability. Similar to a standard credit check, employment credit checks reveal your credit card balances, debts, record of on-time payments, and any derogatory marks on your credit report.

Employers won’t be able to check your credit score during an employment screening — they can only see your credit history. A good credit history makes you seem like a responsible potential employee, increasing your chances of getting the job. Conversely, a bad credit history might decrease your chances of getting a job for which you might otherwise be qualified.

Why do employers check your credit?

Employers review your credit history as part of their hiring process to assess your trustworthiness. They may see applicants with a bad credit history, evidenced by excessive debt or past financial mismanagement, as more likely to cause financial or reputational issues.

Here are some insights employers get when checking your credit report:

• Identity verification: Employers confirm your identity using credit checks to help prevent employment fraud.
• Financial responsibility: Employers evaluate your payment history and credit usage to gauge your financial responsibility.
• Debt load: Employers may view high debt levels as a sign of financial mismanagement, which could affect job performance.
• Multiple hard inquiries: Employers might see numerous hard inquiries as an indicator of financial distress and potential distraction.

The CEO of the Society for Human Resource Management (SHRM) had this to say on when employers become concerned about an applicant’s credit:

Employment credit checks arguably have more weight for certain jobs, including roles that directly involve financial responsibility, like personal banking or investment management. They may be less common for positions like grocery store clerks, delivery drivers, and laborers.

Typically, employers initiate a credit check as the final step in the application process because it costs money. Understanding what employers look for in your credit report is crucial to minimize the risk of your application failing at the last hurdle.

What do employers look for in a credit check?

Just like creditors, employers seek applicants with a strong credit history, a consistent payment record, low credit utilization, and manageable debt. Essentially, any factor that lowers your credit score could also impact your job prospects.

Here’s what an employer looks for when reviewing your credit history:

• Consistent payment history: Employers value applicants who demonstrate responsible financial management through on-time card payments. A history of late debt payments, and especially a record of accounts gone to collection, potentially decreases your chances of employment.
• Low credit utilization: Employers may prefer applicants who use a smaller portion of their available credit. Maxing out credit cards can suggest over-reliance on debt, which employers might perceive as financially irresponsible.
• Debt-to-income ratio: Employers assess your debt relative to your income. If your debt burden seems too high to manage comfortably, they may view it as a sign of poor financial management.
• Bankruptcies: Employers could consider bankruptcy a serious financial setback with long-term consequences. They may see it as a potential distraction that could negatively affect your job performance, meaning you’ll want to remove them if possible.

Proactively working on improving your credit before a job search could boost your employment prospects. Paying off past-due accounts or decreasing your credit utilization, for example, might make a positive difference in your chances of passing the check.

What do employers see in an employee credit check?

When conducting a credit check for employment, employers review identifying information, active credit accounts, payment history, and accounts in collections. These checks often provide data going as far back as seven years.

Employers will see the following information when making these requests:

• Personal information: This includes your name and address, which employers will verify against the information in your job application.
• Credit accounts: Employers can view your current credit accounts, including credit cards, loans, and mortgages, to assess your available credit and outstanding balances.
• Payment history: This includes any late payments or collection notices from the past seven years.
• Bankruptcies: Any bankruptcies you have applied for go back up to seven years.
• Changed accounts: This includes the date the accounts may have been opened or closed.
• Credit inquiries: Employers can view the number of hard inquiries on your credit report.

Employment credit checks are less detailed than standard credit reports; they often exclude the following information:

• Credit score
• Account numbers
• Income
• Medical bills
• Marital status
• Race
• Ethnicity

Employment credit checks omit this information to prevent discrimination, helping to prevent unfair hiring practices by hiding certain personally identifiable information (PII).

Will an employment credit check hurt your score?

Credit checks for employment do not hurt your credit score because they are soft inquiries, not hard inquiries. That means, even if you apply for multiple jobs in a short timeframe, you won’t suffer credit score damage. Hard inquiries are generally only used when you make new credit applications.

What are your rights during a pre-employment credit screening?

Before conducting a credit check for a job, employers must provide you with written notice and obtain your consent. You also have the right to receive a copy of the screening, challenge any inaccuracies, and request clarification if they reject your application based on credit data.

Here are the rights you need to know during a pre-employment credit screening, mostly based on the Fair Credit Reporting Act (FCRA):

• Employers must notify you in writing: Employers must inform job applicants about the credit check during the application process. This notification must be clear and visible, separate from other application materials.
• Employees have a right to get a copy: In most states, a free copy of the employment credit report should be provided within 60 days. Review your state’s employment laws to see if your copy should be provided earlier.
• Employers must explain their decision to reject: If an employer rejects your application due to credit screening, they must provide a pre-adverse action notice. This notice should clearly explain the reasons for rejection.
• Applicants have the right to dispute: You have the right to dispute any false information on your pre-employment credit report. After correcting any errors, you can then resubmit the updated report.
• Employers must give applicants time to respond: Employers must give you a reasonable timeframe to respond to inaccuracies in the report. This period is generally about five days in most states, but it may vary depending on where you live.

What states have banned employment credit checks?

Several states have enacted legislation limiting the use of employment credit checks in the hiring process. States that ban or restrict credit checks for employment include California, Colorado, Illinois, Connecticut, Delaware, Maryland, Nevada, Oregon, Vermont, Washington, and Hawaii.

These are rarely outright prohibitions, but instead bans on employment credit checks before a conditional offer is made. Many of these states also have restrictions that prevent employers from running a credit check unless the information is materially relevant to the role.

In these states, credit checks for positions involving significant financial responsibilities, such as accounting or financial management, are generally still permitted.

Here are some links to each state’s unique labor laws:

• California: Labor Code 1024.5
• Colorado: 8-2-126, C.R.S
• Illinois: Ban in the box law
• Connecticut: Public Act No. 11-223
• Delaware: General Provisions 709B
• Maryland: Job Applicant Fairness Act (JAFA)
• Nevada: NRS 613
• Oregon: ORS 659A.320
• Vermont: S.95 (Act 154)
• Washington: RCW 19.182.020
• Hawaii: Employment Practices 378-2.7

If you’re confused about whether employment credit checks are allowed in your state or city, contact your local Department of Labor for details.

How to prepare for a hiring credit check

Before applying for jobs, get a copy of your credit report. Having this information on hand will help you understand the factors impacting your credit history, so you can take action to fix them or consider the best way to explain any issues employers might see on your report.

Once you get your credit report, follow these steps to make your employment credit check go smoothly:

• Unfreeze your credit: Employers won’t be able to access your credit data unless you unfreeze your credit. Contact the credit bureaus where your credit is locked to do this. To maintain your protection, consider placing a fraud alert in the interim.
• Avoid using too much credit: Try to avoid using more than 30% of your total credit while applying for jobs. This will help keep your credit utilization low, which may indicate to potential employers that you’re financially responsible.
• Pay your bills: Pay your credit bills on time or ahead of schedule to avoid late payment records or other derogatory marks on your credit file. Take extra care to prevent late payments from turning into collections.
• Prepare explanations of negative information: Employers can ask for reasoning to better understand how you manage credit. Prepare to justify any negative credit marks to help them understand your situation.
• Monitor your credit report: Credit monitoring or identity theft protection services can help you protect your credit from the consequences of identity theft or fraud, providing alerts if they detect suspicious changes to your credit report.

For credit monitoring across all three of the major bureaus, join LifeLock Ultimate Plus. It’ll help you monitor your credit file for signs of fraud, track your progress with daily credit reports, and get alerts if you’re at risk of identity theft. Protecting your credit can help you improve your job prospects.

Why pre-employment credit checks are controversial

Pre-employment credit checks are a subject of some controversy, with critics claiming that they’re an extra barrier to employment for low-income job seekers. A Demos study revealed that 1 in 10 unemployed respondents were denied employment because of their credit.

Here are some other criticisms of the practice:

• Disconnect with job performance: One study of 178 employees revealed that various credit predictors, such as late payments, showed no relationship with performance ratings or termination decisions.
• Employer assumptions: Another study of 57 hiring professionals revealed that some employers make ungrounded assumptions about negative credit based on employment credit checks.
• Disproportionate impact on low-income individuals: A study across multiple states with various laws on employment credit checks revealed that job-finding rates for financially distressed job seekers are 28 percent higher when credit checks are banned.
• Potential discrimination against women: Due to earning disparities and other factors, women are more likely to use a larger portion of their credit.
• Discrimination against minority groups: The Equal Employment Opportunity Commission (EEOC) found that the credit check policy of one business resulted in higher rejection rates for minorities than for white candidates (13.5% to 14.5% compared to 8%, respectively).
• Credit reports could be inaccurate: An investigation revealed that almost half of a group of 4,000 people found errors on their credit reports, with more than a quarter of this group finding serious, credit-damaging errors.

Help protect your credit and employability

If it goes unchecked, credit-damaging fraud can harm your employability and your ability to get new credit. Monitor your credit for signs of unauthorized activity with LifeLock Ultimate Plus, and get daily credit reports that also help you track your credit-building progress.

FAQs

Are pre-employment credit checks the same as background checks?

No, pre-employment credit checks are a specific kind of background check focused on your credit history. Both credit and background checks could be part of the employment qualification process. Other types of background checks may include checks for criminal history, drug screenings, or employment and education verification.

How do pre-employment checks differ from regular checks?

Employers use pre-employment credit checks to assess employability, while creditors use regular credit checks to see if you qualify for a loan or credit card. Employment credit checks are less comprehensive and don’t impact your credit score.

Can an employer see my credit score?

Employers cannot see your credit score through an employment credit check. Some cities, such as New York City, have specific restrictions on what employers can ask about your credit history.

How do I check my credit score?

You may be able to check your credit score with tools offered by your credit card company or bank. Alternatively, you can keep up with your credit score through the daily updates that come with LifeLock Ultimate Plus.