The hiring process includes several steps, such as submitting an application, attending an interview, and undergoing a background screening. In some cases, a prospective employer may even require a credit check. Find out why employers check your credit and discover how to prepare for this important step in the hiring process.
Why Do Employers Check Your Credit?
When you apply for a job, the prospective employer uses your résumé, cover letter, and other information sources to determine if you’re a good fit. It’s also common for employers to conduct interviews and administer preemployment tests. If an employer extends you an offer, they may also check your credit as part of a comprehensive background check.
Employers perform credit checks for three reasons: to manage risk, comply with government requirements, and reduce liability.
1. Manage Risk
Employee fraud is a major problem, costing organizations over $3.6 billion per year. The risk of fraud increases any time an employee has access to petty cash, company checks, and other assets. To better manage their risk, some organizations conduct credit checks before onboarding new employees.
Checking an employee’s credit doesn’t eliminate the risk of fraud, but it does give employers valuable information. For example, if an employee has several delinquent accounts, they may be tempted to use a company credit card to pay their bills. Even if you’d never do such a thing, a prospective employer may decline to hire you if a credit check shows you’re having financial problems.
2. Comply With Government Requirements
Many government jobs require security clearances, which help state and federal agencies determine who should have access to sensitive information. If you plan to apply for one of these jobs, be prepared to undergo a credit check as part of the hiring process.
In these situations, prospective employers conduct credit checks to comply with government requirements. For example, the FBI must follow clearance procedures set forth by executive order when hiring employees with Secret and Top Secret clearances.
3. Reduce Liability
In many cases, employers are liable for the actions of their employees. For example, if an employee mismanages funds, a company’s shareholders could sue the firm for any losses arising from the incident. Comprehensive background checks, which often include credit checks, may limit an employer’s liability if employees commit illegal or unethical acts.
Components of an Employer Credit Check
When a prospective employer checks your credit, they don’t see your official credit score. However, they do gain access to the following types of data:
- Open accounts
- Closed accounts
- Payment history
- Bankruptcies
- Foreclosures
- Charge-offs
- Collection accounts
Your prospective employer could also see other information regarding things like your criminal history, education status, and address history.
Laws Governing Employer Credit Checks
When conducting credit checks, employers must comply with the requirements set forth in the Fair Credit Reporting Act (FCRA). The law governs what employers can do before and after they check your credit. Here’s what an employer must do before obtaining a copy of your credit report:
- Get your permission in writing
- Notify you that they may use your credit information to make employment-related decisions
- Inform the credit reporting agency that they’ve complied with the FCRA requirements
If the employer takes adverse action based on the results of a credit check, they must also do the following:
- Give you a copy of a document titled “A Summary of Your Rights Under the Fair Credit Reporting Act”
- Provide a copy of your credit report
- Let you know that you have the right to dispute any of the information found in your credit report
- Provide the name and contact information for the consumer reporting company that provided your credit report
- Produce a statement letting you know that the consumer reporting company didn’t make the decision to take adverse action against you
Your state may have additional requirements related to credit checks. For example, California only allows employers to conduct credit checks for a limited number of positions. A California employer may also conduct a credit check before hiring someone who’ll have regular access to at least $10,000 in cash.
How to Prepare for an Employment-Related Credit Check
Now that you know why employers check your credit, you need to prepare for future job opportunities. Follow these steps to strengthen your financial position and make yourself more appealing to prospective employers.
Check Your Own Credit
Many consumers have at least one error on their credit reports. Some errors are minor, but others hurt your credit scores and may make it more difficult to find a job. For example, if your credit report lists a charge-off when you’ve never made a late payment in your life, that charge-off could make prospective employers think you’re irresponsible with your money.
Before you apply for a job, get copies of your Equifax, Experian, and TransUnion credit reports. If you use AnnualCreditReport.com, you can get one free copy of each report every week. Once you have your reports, review them carefully to make sure they’re accurate. Look for incorrect account balances, open accounts marked as closed, and other types of mistakes.
If you notice any mistakes on your report, dispute them right away. Although the major credit bureaus allow online disputes, it’s better to dispute each error by mail. When you mail a dispute letter, you have the opportunity to provide additional documentation to support your claim.
Every time you write a dispute letter, make sure you send it via certified mail so you have proof of delivery.
Make On-Time Payments
Making payments on time is one of the best ways to build a strong credit profile, and it may also help you pass a preemployment credit check. If you’re worried about forgetting a due date, set up automatic payments for each account.
Pay Down Your Debt
Having debt isn’t necessarily a bad thing, but some debts are more concerning to employers than others. For example, it’s perfectly fine to have a mortgage with a $200,000 balance. As long as you make your payments on time, an employer isn’t likely to worry about a home loan.
If you have $50,000 in credit card debt, however, a prospective employer may hesitate to hire you. This is especially true if you can’t pay more than the minimum amount due each month. To avoid increased scrutiny during an employment-related credit check, do your best to reduce your debt balances.
Take Care of Past-Due Accounts
If you have a collection account or a charge-off on your credit report, there’s no need to be ashamed. However, you do need to take control of your finances. Contact your creditors to negotiate settlements or arrange to pay off your past-due accounts.
Building a Strong Credit History
Your credit history has a major impact on your life because it affects your ability to buy a vehicle, qualify for a home loan, and land the job of your dreams. Stay on top of your credit by checking your reports regularly and addressing any errors. You can get started on this goal by signing up for your free credit report card from Credit.com today.
