Bad credit can make life harder in ways you may not fully appreciate until it’s far too late. Consequences of bad credit can include not being able to qualify to rent an apartment as well as an inability to qualify for credit cards or personal loans. You will also probably be stuck paying higher insurance premiums, and it’s extremely likely you’ll pay higher interest rates and more fees when you are allowed to borrow money.
Poor credit could mean missing out on a job you really want, too — even if your biggest credit mistakes took place years ago.
Can employers check your credit?
Yes. You read that right; bad credit can impact your ability to qualify for jobs. However, this is only true when employers take steps to check your credit in the first place. And don’t worry this won’t happen without your knowledge. 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.)
While there are no recent stats to prove just how many employers check credit before they hire, a 2016 study from CareerBuilder noted that 29% of 2,379 hiring and human resources managers ran credit checks on prospective employees before extending an offer.
These employment-related credit checks 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 but instead 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 notimpact your credit score.
Note, however, that not all employers are able to consider your credit before they hire you. At least ten states have passed laws that prohibit or employer credit checks or limit the information they can see. This includes California, Colorado, Connecticut, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont and Washington.
Why do employers check 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), employers look for long-term trends in your credit history, not whether you missed a loan payment or forgot to pay your Visa 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 state that a bad hire usually costs them $24,000 on average. That’s not chump change by any means, so it’s easy to imagine why employers would take extra steps to limit their chances at winding up with a costly employee that doesn’t work out.
What do employers look for in a credit check?
“They’re looking to see if the person can handle their personal finances,” Aitken says. “In particular, they care about when things go into default or judgment,” he says.
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:
Length of time at current address as well as previous addresses
Employment information, including previous work history
Other names used, such as maiden names and aliases
Information on bankruptcies, liens and judgments against the applicant
When do employers check your credit?
Fortunately, it’s unlikely you’ll need to endure a separate credit check for every job application you submit. Aitken says it can cost employers upward of $200 to run background checks on each applicant, so they’ll usually wait until they’re almost ready to make a job offer.
Can you get a job with bad credit?
Before an employer decides not to hire you based on information in your credit report, the FCRA requires them to “provide to the consumer a copy of the consumer report and a summary of the consumer’s rights as prescribed by the Federal Trade Commission,” notes Experian. 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 to 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 on your report. If you have bad credit and know it could impact your ability to get a specific job, however, you may want to be proactive about it instead of seeing how it plays out.
If you have serious credit issues, Gail Cunningham, vice president of public relations for the National Foundation for Credit Counseling in Washington, D.C., even suggests being 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,” she says.
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.