Bad credit can make life harder in ways you may not fully understand until it’s too late. If your credit score isn’t that great, you might not qualify to rent an apartment or take out a personal loan. Additionally, you could be limited to credit cards for those with bad credit, receive higher insurance premiums and pay more in interest rates and fees when borrowing money

Poor credit could also mean missing out on a job you really want. Many employers perform pre-employment credit checks before making hiring decisions, which means bad credit can impact your ability to qualify for jobs.

A 2016 study from CareerBuilder found that 72 percent of 2,379 hiring and human resources managers ran background checks on each prospective employee, and 29 percent of those managers looked for credit information.

A credit check for employment is a standard part of many hiring processes, especially if you’re applying for a job that involves handling money or dealing with company finances. Here’s what you need to know about pre-employment credit checks, what a credit check shows, and why employers do credit checks in the first place.

When can an employer check your credit?

Before an employer can view a modified version of your credit report, the Fair Credit Reporting Act (FCRA) requires them to get your permission in writing. You have the right to deny companies access to your credit report, but it’s likely potential employers will see this as a red flag. If you’re planning on getting a job, you’re probably going to want to give employers permission to do a pre-employment credit check.

Credit checks for employment are absolutely legal in most states, although employers are only authorized to see a modified version of your credit report. They cannot see your actual credit score; instead, they see an overview of whether you pay your bills on time, how many debts you have and other details about your creditworthiness. Unlike other credit inquiries, employment inquiries do not impact your credit score.

Not all employers are able to consider your credit before they hire you. At least eleven states have passed laws that restrict or limit employer credit checks, including California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont and Washington.

Why would an employer look at your credit?

If you’re wondering why employers would care about employee creditworthiness, you don’t need to look any further than their bottom lines.

According to Mike Aitken, director of government affairs for the Society for Human Resource Management (SHRM), in a previous interview, employers look for long-term trends in your credit history, not whether you missed a loan payment or forgot to pay your credit card bill a few times. If you’re habitually paying bills so late they go into default, for example, it’s easy for employers to imagine you might fall behind on your workplace responsibilities, as well.

The reality is, bad hires cost companies in terms of productivity and profits, and employers want to save their time, resources and training for employees they think will work hard and stick around.

According to CareerBuilder, the average cost of a bad hire for a company with less than 500 employees could be as much as $11,000. However, companies with more than 1,000 employees said a bad hire usually costs them $24,000 on average. That’s not chump change by any means, so it’s easy to see why employers may take extra steps to limit their chances of winding up with a costly employee that doesn’t work out.

The cost of a credit check, on the other hand, means it’s unlikely you’ll need to endure a separate credit check for every job application you submit. In a previous interview, Aitken said it can cost employers upwards $200 to run background checks on each applicant, so they’ll usually wait until they’re almost ready to make a job offer.

What do employers look for in a credit check?

When a prospective employer runs a pre-employment credit check, “They’re looking to see if the person can handle their personal finances,” said Aitken in a previous interview. “In particular, they care about when things go into default or judgment.”

Credit reporting agency Experian says employer credit checks can also provide “credit information that would normally not appear on an application but may have an impact on job performance.”

Employer credit checks can also help companies confirm your identity or reveal conflicting information that may require further review. Other information employers can discover using employment credit checks can include:

1. Length of time at current address, as well as previous addresses
2. Employment information, including previous work history
3. Other names used, such as maiden names and aliases
4. Information on bankruptcies, liens and judgments against the applicant

What decisions are based on a credit report?

Before an employer decides not to hire you based on information in your credit report, the FCRA requires them to supply both an outline of your rights (as defined by the Federal Trade Commission) and a copy of your report. In other words, you won’t be looked over for a job without being informed your poor credit played a role.

The Federal Trade Commission (FTC) also notes that employers are required to provide you with notice of your right to dispute incorrect or incomplete information on your credit report and get an additional free credit report from the company who asked for it within 60 days.

Unfortunately, employers are not required to give you the opportunity to explain your poor credit or any credit mishaps noted in your report.

Will employees look at credit more during this economic downturn and as the economy improves?

It’s possible a potential employer may sympathize with your credit problems if they were for good reason, such as a health scare in the family or a job loss during an economic downturn. Some types of credit problems may also be easier for employers to understand, such as delinquent student loan debt or unpaid medical bills.

The coronavirus pandemic has prompted many lenders to offer forbearance programs or other types of hardship programs designed to help people whose lives and finances have been impacted by COVID-19. In most cases, these programs will protect your credit during a temporary period of financial uncertainty, in turn potentially protecting you during employer credit checks (assuming you were using credit responsibly prior to the pandemic).

If you have serious credit issues, Gail Cunningham, vice president of public relations for the National Foundation for Credit Counseling in Washington, D.C., suggested in a previous interview to be upfront about it. “I would be truthful and say succinctly what happened that caused your financial hiccup and how you intend to pull out of it,” said Cunningham in a previous interview.

This advice becomes even more important as the economy improves. If you’re dealing with financial hardship right now, do your best to remain current on your credit accounts, either by paying at least the minimum on your bills each month or by signing up for a forbearance program that allows you to temporarily postpone your payments without taking a hit to your credit.

That way, once the economy and the job market pick up again, a pre-employment credit check will be more likely to show a history of responsible credit decisions and make your potential employer’s hiring decision just a little bit easier.