Employer credit checks: Who does them, how they work and what laws apply

Applying for a new job? A credit check could determine your fate, depending on the position and where it’s based.

A survey from the National Association of Professional Background Screeners (NAPBS) found 95 percent of companies do some type of background check on job candidates. Of those, 16 percent conduct credit or financial checks on all job candidates, and almost one-third do credit checks on some candidates.

What will a prospective employer look for?

If you’ve filed for bankruptcy or have high levels of debt, those might influence your ability to be hired for a particular position, says Rod Griffin, publication education director at Experian, one of the three main national credit reporting bureaus.

Information such as credit balances and bankruptcies are “relevant to financial and security checks,” Griffin says. Employers may fear that “if you are in financial distress, you may be susceptible to bribery.”

At the same time, “your credit report is just one factor of many that might be considered” when you’re applying for a new job, he says.

David Reischer, founder of LegalAdvice.com, says he runs credit checks and criminal background checks on all prospective employees.

“I don’t like seeing bankruptcies. I don’t like seeing collections. I don’t like seeing large student loan debt,” he says.

He’ll then talk to the job applicants to get a better idea of their history. But even a less-than-stellar credit report “is not anything fatal, per se,” Reischer says.

See related: Employers running credit checks on job applicants must tread carefully

What positions do credit checks typically apply to?

Credit checks tend to be most common when companies are hiring top managers or employees who work with money, such as accountants and store clerks, Griffin says.

David Sawyer, president of the background screening company Safer Places Inc., says “You almost never see someone turned down just on their credit report.” Although if someone is applying for a chief financial officer position and has bad credit, it’s unlikely they’ll be hired for that position.

Otherwise, if someone is applying for a position such as salesperson or delivery driver and has “marginal credit, but the rest is good, I tell them not to worry about it,” Sawyer says.

They also may be conducted for certain sensitive positions, such as working with caustic chemicals. Credit checks are seen as a way to help verify someone’s identity. “It’s a security step rather than a financial issue,” he says.

Credit reports also are a way to check someone’s previous employers, Sawyer says. On a job application, “someone may leave off an employer because of bad references.”

When it comes to credit checks, “each company is different. They value certain things about a candidate, depending on their role,” says Elizabeth McLean, compliance attorney at GoodHire, a company that conducts background checks for employers.

Because it costs a company extra to check a prospective employee’s credit report, it makes employers less likely to pull the credit reports of all potential hires, McLean says.

See related: 6 myths about credit report checks by employers

What’s the process?

The NAPBS survey found more than 60 percent of companies conduct background checks after they make a conditional job offer to a candidate, while more than one-quarter do the background checks after a job interview.

The vast majority of employers say they conduct background checks in order to protect employees and customers, the survey found. More than half do them to improve the quality of new hires, and more than one-third do them to prevent or reduce theft, embezzlement and other criminal activity.

Under the FCRA, employers must receive your written consent on a stand-alone document before they can check your credit, Griffin says.

In a credit check, a prospective employer will receive typical credit report information such as your name; address; employer; open lines of credit, such as mortgages, credit card and auto loans; amount you owe on those lines of credit; late payments; and whether you’ve filed bankruptcy in the past 10 years.

Information such as credit balances and bankruptcies are “relevant to financial and security checks,” Griffin says. “If you struggle to pay your bills, they may want to make sure you’re not susceptible to bribery.”

At the same time, many employers recognize that job-seekers might have been impacted by the Great Recession, and might have experienced financial difficulties as a result, he says.

Employers don’t get two big pieces of information. “They don’t receive credit scores. That, perhaps, is the most common myth that we hear,” Griffin says. They also don’t receive your account numbers.

An employer credit check is considered a “soft” pull and won’t impact your credit score.

See related: How to handle unpaid corporate credit card

What are the limits?

While federal legislation allows employers to conduct credit checks of potential employees, some states specifically restrict the practice.

California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont and Washington all limit the use of employment credit checks. Some cities, such as New York City and Washington, D.C., also restrict them.

Last year, Sen. Elizabeth Warren filed the Equal Employment for All Act, designed to prevent employers from checking a prospective employee’s credit history. Warren said the measure was needed after the Equifax 2017 data breach compromised more than 140 million Americans’ personal information.

If an employer is located in one of the states or municipalities that restricts credit checks, or is hiring employees who live in one of the places that does so, it’s important that they understand exactly which state’s law applies, McLean says.

If an employer intends to reject you for a job because of your credit report, the company must notify you and include a copy of the report it used to make the decision, according to the Fair Credit Reporting Act (FCRA). That way you can review the information and dispute it if it’s incorrect.

The Federal Trade Commission (FTC) enforces the FCRA. If an employer does a credit check without your permission, or turns you down for a job without sending you the notices required, you can contact the FTC at FTC.gov or call 1-877-FTC-HELP (1-877-382-4357).

Check your credit before you apply

Before you apply for a job, Griffin recommends requesting a copy of your credit report so you “know what’s there and can identify what you might want to work on,” such as correcting errors or catching up on late payments. That will put you “in a better position to qualify so you can get the job of your dreams.”

The FCRA requires that each of the three national credit reporting companies – Experian, Equifax and TransUnion – provide you with a free copy of your credit report once every 12 months. If you are unemployed, you can get an extra free copy. You can request your report at AnnualCreditReport.com.

To help protect themselves from identity theft, some consumers have been paying a fee to have “freezes” put on their credit reports. As of September, the freezes are free. A freeze blocks a lender from checking your report and can help prevent criminals from opening up accounts using your personal information. You have to lift the freeze to allow a lender to check your credit.

However, employers can still check your credit with your written consent, and you don’t have to worry about lifting the freeze, Griffin says.