Bad credit has always had a significant impact on your financial eligibility for mortgages, car loans, credit cards and personal loans. But today, your credit score may play a bigger role than ever before in your job search as well.
According to a 2010 survey by the Society for Human Resource Management, 13% of companies surveyed check the credit reports of all candidates, and a nearly 50% check the credit reports of at least some candidates.
Why Do Employers Check Credit Ratings?
You may be wondering why employers feel your credit rating is indicative of your potential job performance. They actually have many good reasons to be concerned:
- The most obvious reason is that some employers feel that employees with bad credit are more likely to steal or embezzle from the company.
- Many employers feel that applicants with good credit are generally more responsible than those with bad credit. Note that in addition to outstanding debt and payment history, factors such as bankruptcies, foreclosures, legal judgments, and tax liens may also show up on the credit report.
- Employers would obviously prefer that creditors not contact employees at work in an attempt to collect past due debts. Furthermore, they really don’t want their payroll departments spending valuable time and resources to garnish an employee’s wages.
The type of job you are applying for may determine whether or not your prospective employer does a credit check. Below are the types of jobs that are more likely to require a credit check as a condition of employment:
- Positions that involve handling money, such as a cashier.
- Positions that involve financial responsibility, such as accounting.
- Positions with security clearances.
- Executive positions.
Is This Legal?
In most cases, it is. The Fair Credit Reporting Act (FCRA) is a U.S. federal law that authorizes employers to obtain information from the credit reporting agencies such as Equifax, Experian and TransUnion. However, employers must obtain permission from you in writing before accessing your credit. You have the right to refuse the request, but if your prospective employer is asking, declining would likely reduce your chances of getting the job.
You may be asked to sign a credit authorization document when you fill out the job application. In many cases, the company might not actually look at your credit report until they are confident that you are a good candidate for the job. Credit reports and other investigative reports can cost a company as much as $200, so they won’t want to spend their money on non-viable applicants.
Applicants are entitled to a copy of the credit reports that the employer has accessed. You have 60 days to request the report from the employer.
Recent Changes in the Law
In the past few years, there has been substantial public opposition to pre-employment credit checks. Many otherwise responsible individuals now have imperfect credit because their homes were foreclosed upon during the recession. This, along with the extremely high unemployment rate, is making it much more difficult for some to find a job.
The public backlash has translated into legislation primarily at the state level. Illinois, Hawaii, Oregon and Washington were the first states to enact laws limiting the use of credit reports for pre-employment background checks. According to the National Conference of State Legislatures, another 25 states had bills pending in the 2011 legislative session. Of these, Arizona, Connecticut, Maryland and New York have now enacted legislation. Note that most of these laws have exemptions that still allow pre-employment screening for certain types of jobs.
What Can You Do to Protect Yourself?
So you have bad credit, but need to apply for a job. All is not lost. There are a few things you can do to prepare:
- The most important thing you can do is obtain free copies of your credit reports from Equifax, Experian and TransUnion. Review the reports carefully to make sure that they are accurate. If there are problems, contact the agencies to have them corrected BEFORE your job search. Review our previous article on how to understand credit scores and instructions for obtaining and correcting credit reports.
- Do everything you can to improve your credit rating such as paying bills on time and paying off your existing debt. If possible, do not unnecessarily open new accounts or close existing accounts.
- Be sure to get a copy of the credit report from the prospective employer. It may be different than the reports you obtained yourself.
- If you have bad credit, prepare an explanation for the employer in advance. Some experts recommend that you put this in writing or practice an oral response. It is important to be direct and confident in your response.
- If you’re still worried about your imperfect credit history, you may want to focus your search on the types of jobs that are less likely to require a credit check.