Why Do Employers Check Your Credit?

Some employers do credit checks before hiring to help limit their risk. Here’s what they look for, your legal rights, and how to maintain a positive credit profile.

By Allan Halcrow | American Express Credit Intel Freelance Contributor

7 Min Read | November 1, 2021 in Credit Score

 

At-A-Glance

Employers usually try to limit their risks when hiring. Reviewing credit reports helps to verify your identity and anticipate how you might perform on the job.

Given the widespread use of credit reports in employment, it’s a good idea to maintain a positive credit profile. 

Concerns about the fairness of using credit reports in employment have led to federal, state, and local laws restricting their use. It’s important to learn your related rights.

To increase the odds that you’ll land your dream job, you’ll want to have a polished resume, a strong cover letter, and a positive credit report. The resume and cover letter are obvious. But why think about a credit check for employment? The simple answer is that many employers believe your credit report offers valuable insight as to whether you’ll be a good employee – insight they may be hard-pressed to get from other sources.

 
Let’s explore the insights that employers seek, as well as the data they see – and don’t see – to reach those insights.

 

Why a Credit Check for a Job? To Help Limit Employer Risk

First, it’s important to understand that employee background checks of all types – including credit checks – serve a common purpose: to help reduce the risk of hiring someone unfit for the job. For example, public companies are obligated to protect their employees and the interests of their shareholders, but suppose an employee embezzles funds. If that employee’s credit report shows a history of mismanaging money, shareholders could potentially sue the employer for negligent hiring. Reviewing credit reports is one piece of proof that an employer tried to learn everything possible about an employee’s background before making a job offer.


Although a credit report is not, by itself, proof of anything, employers often review it for certain behavior patterns, like:

  • Money management. Employers are more inclined to check the credit of applicants for money-related jobs, such as accountant or retail clerk. An employer may feel that a solid history of handling your money well shows an ability to handle the company’s finances well, too. Of course, the employer may also see the inverse: Poor management of your own money could potentially indicate you won’t manage the employer’s money well, either.
  • Decision making. If a credit report shows a perfect history of on-time payments and consistently low balances, that can suggest good decision-making skills. On the flip side, frequently carrying high balances or making late payments could indicate poor decision-making skills. More serious events, such as a foreclosure or tax lien, can be seen as harbingers of irresponsibility or negligence.

These concerns are also why credit reviews are part of background checks for a security clearance. Such clearances are required for all government employees who work on or near classified information or systems. Financial issues are one of the primary reasons that security clearances are denied, revoked, or reduced.


Beyond looking at candidates’ financial histories, some employers use credit reports to verify information provided elsewhere. For example, reports also include your past employers, so they may be used to confirm your job history or to reveal undisclosed gaps in employment. Among other things, credit reports may be used to verify your identity because they include your Social Security number.

 

Employer Credit Checks Show a Limited Credit Report

Whatever the motivation for doing a credit check for employment, employers don’t see everything. Here’s what they do see:

  • Information tied to your identity. This may include your name, any previous or alternate names, your Social Security number, and your recent addresses.
  • The amount you owe your various creditors. This includes the types of creditors you owe. They can see, for example, whether you have a mortgage.
  • Your payment record. This may include any late or missed payments or accounts referred to collection.
  • Your available credit. The total of credit limits from all your credit cards and other types of revolving debt, such as a home equity line of credit (HELOC).
  • Certain public records. This may include any bankruptcies within the past seven to 10 years.

However, employers do not see some other information, including:

  • Your credit score. Although they’ll see a lot of data about your credit, they’ll have to guess at your actual score. Despite widespread belief to the contrary, employers do not see your credit score.
  • Your birthdate. To help protect candidates from age discrimination, the credit reports employers see omit your birthdate.
  • Account numbers. These are left out to protect our financial security.

 

Job Candidates’ Credit Report Rights

Use of credit reports for employment background checks is far from universal, partly because some employers aren’t convinced they’re relevant to job performance and partly because of concerns about their fairness. Currently, several states and cities have laws limiting or prohibiting the use of credit checks for employment.


In addition, several laws are intended to protect people’s rights as a job candidate. If you’re job hunting, it pays to know:

  • Employers must get your written permission to pull your credit report. That said, some caveats remain. First, if you deny your permission, an employer has the right to halt the hiring process. If you do give your OK, the employer’s inquiry will not show on your credit report or affect your credit score.
  • Employers must share their concerns. If an employer sees something on your report that it considers negative, it must give you a formal notice and a copy of the report it reviewed.
  • Employers must give you time to respond. Likewise, it must give you time to explain or dispute the information before using it to make a hiring or promotion decision.
  • You have a right to know why. If an employer decides not to hire you based on information in your report, it is required to tell you how and why it made that decision.

 

Be Proactive to Help Make Your Credit Report Positive 

Knowing that your credit report could very well be important in your job search, so it’s important to be proactive about having a positive credit report. The following practices can help:

  • Pay your bills on time.
  • Use less than 30% of your available credit.
  • Limit applications for new credit.
  • Maintain a variety of different credit accounts, for example, both credit cards and loans.

If you do have blemishes on your credit report, you may want to volunteer what your report will reveal and explain what happened, rather than waiting for the employer to discover it.

 
Finally, if you’re planning on looking for a job, it’s a good idea to get copies of your credit reports from all three national credit bureaus so you know exactly what’s in it. You don’t want a potential employer to surprise you. And if your report includes errors, you’ll want time to correct them.

Did you know? As an added security measure to help protect against fraud, American Express reports a reference number to credit bureaus – instead of your actual account number.

 

The Takeaway

Despite some concerns about how relevant the data in them may be, credit reports remain a common component of pre-employment background checks. You can try to make your report an asset by maintaining a positive credit profile. But if your report isn’t terrific, you can try to minimize its impact by being forthright about what’s in it and explaining what happened.

Allan Halcrow

Allan Halcrow is a freelance writer concentrating in business, human resources, and diversity and inclusion. He is also the author of four books on management.

 

All Credit Intel content is written by freelance authors and commissioned and paid for by American Express. 

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