Under Fire: Mixing Credit Reports With Hiring Decisions

Employers are increasingly turning to credit scores to help screen applicants who may be unreliable or a risk of theft. But many states are questioning using credit scores to judge someone's job qualifications.

Under Fire: Mixing Credit Reports With Hiring Decisions Photo (cc) by aflcio

This story comes from partner site lowcards.com

According to the latest figures in September, the unemployment rate was 9.6%. A total of 14.8 million people were unemployed last month and 41.7% of those have been out of work for six months or more. Good jobs are hard to find, and may be nearly impossible if you have bad credit.

Employers are increasingly turning to credit scores to help screen applicants who may be unreliable or a risk of theft. But many states question the fairness of using credit scores to judge someone’s job qualifications. The House has proposed a bill that will prohibit this.

“Credit checks can weed out people who may be undesirable for a job, but there are many reasons why a person’s credit score drops that is not a reflection of their character. If a person has a lower score because the credit card issuer slashed the card’s credit limit or there is an error on the credit report, this shouldn’t prevent that person from getting a job,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

Why Employers Use Credit Checks

Fraud is a high cost of business. The median fraud loss for U.S. companies is $160,000 according to the Association of Certified Fraud Examiners (ACFE) 2010 Global Fraud Study. The study found that two common warning signs for employees who commit workplace fraud are having difficulty meeting financial obligations and living beyond their means. The study went on to say that these signs can not be detected by traditional methods.

According to a recent survey from the Society for Human Resource Management, 60% of employers use a credit check during some stage of the interview process (65% of large businesses); 13% reported conducting credit background checks on all applicants. 47% of employers who do credit checks do them on select job candidates.

The majority of businesses who do credit checks run them after a contingent job offer and allow job candidates to explain their credit results before the hiring decision is made.

According to the survey, only specific credit information impacts hiring decisions. Pending debt lawsuits and accounts in debt collection are the biggest red flags. Very few consider home foreclosures and past medical-related debt when making an employment decision.

Legal Regulations

The Fair Credit Reporting Act authorizes employers to run a credit check on applicants, but employers must have the applicant’s consent. If the employer considers denying a job because of a credit check, they have to provide a copy of the report and a written description of the applicant’s rights before taking adverse action. The individual also has the right to dispute the accuracy or completeness of any information the agency furnished. The person has the right to an additional free consumer report from the agency upon request within 60 days.

A new bill, H.R. 3149, was introduced this summer to amend the Fair Credit Reporting Act to prohibit the use of consumer credit checks against prospective and current employees for the purposes of making adverse employment decisions. The bill is now in committee.

State lawmakers in 16 states have proposed bills to ban credit checks. Hawaii and Washington already ban credit checks on most applicants.

The Fair Credit Reporting Act also allows employers to use credit reports to evaluate employees for promotion, reassignment, and retention, but it must follow the same rules as the application process.

Protect yourself

Check your credit report for errors. An error on your credit report can prevent you from getting a job. You can get a free credit report each year from the three credit agencies–Experian, TransUnion, and Equifax–at annualcreditreport.com

  • If you find errors, alert the credit-reporting bureaus and creditors in writing. Correcting errors takes time, so review your history at least a month or two before you expect employers, or lenders, to request it.
  • Understand what is in your credit report so you can explain any problem areas. Your credit report includes debt, payment history, number and types of accounts. If you have been through lawsuits, judgments or bankruptcy (bankruptcies remain on your report for 10 years), it will also include these.
  • Do all you can to increase your credit score. Pay all your bills on time. Cut your debt to credit ratio by decreasing the balance on your credit card. Limit your new credit applications.
Stacy Johnson
Stacy Johnson @moneytalksnews
I'm the founder of Money Talks News and have spent the last 40+ years in the personal finance trenches. I'm a CPA, author of a few books and multiple Emmy recipient. I'm ... More


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