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

Summary

If you’re applying for a new job, a credit check could determine your fate, depending on the position and where it’s based. Here’s how they work and what to expect.

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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.

WHAT STATES RESTRICT EMPLOYER CREDIT CHECKS?
StateEmployer credit check restrictions
CaliforniaAn employer can check a credit report only in a number of instances, including for someone seeking:

  • A managerial position
  • A position in the state Department of Justice
  • A law enforcement position
  • A position for which credit report information is required by law to be disclosed
  • A position in which the person would be a signatory on the employer’s bank or credit card account, can transfer money for the employer or enter into financial contracts for the employer
  • A position that involves regular access to $10,000 in cash or more
ColoradoAn employer can only check a credit history if the information is “substantially related” to the potential job, or the person being evaluated or the employer are exempt from the law. Those who are exempt include banks and financial institutions and law enforcement agencies.
ConnecticutCredit checks are allowed in certain cases, such as when:

  • The employer is a financial institution
  • The report is required by law
  • The report is related to a potential job, such as a managerial position that involves setting the direction or control of a business or business division
  • The job involves access to customers’, employees’ or the employer’s personal or financial information, other than information customarily provided in a retail transaction
  • The employee receives an expense account or corporate debit or credit card
DelawarePublic employers can’t inquire into an applicant’s credit history before making a conditional offer of employment.
HawaiiEmployers can only take credit history into account if it is permitted by state or federal law, if it’s a managerial position or if it’s for a financial institution.
IllinoisAn employer can check credit reports if it is a financial institution, insurance company, law enforcement agency, debt collector or government agency that requires the use of a credit history.
MarylandCredit checks can be made in certain cases, such as when:

  • They are required under federal or state law
  • The job is with a financial institution or for an investment advisor
  • It’s a managerial job
  • The job involves access to personal information
  • The job involves the authority to issue payments, collect debts, enter contracts or is allowed an expense account or corporate debit or credit card.
NevadaCredit checks are generally prohibited unless:

  • They are required under state or federal law
  • The employer believes the prospective employee has engaged in activity that violates state or federal law
  • The job involves responsibility for money, corporate debit or credit cards
  • The job is managerial
  • It is a law enforcement job
  • It is with a financial institution
  • It is with a licensed gaming institution
OregonAn employer can only check credit if it is a financial institution, law enforcement or the information is required by state or federal law.
VermontThe employer can check credit in certain cases, such as:

  • The information is required by state or federal law
  • The job involves access to confidential financial information
  • The employer is a financial institution
  • The job is as a law enforcement officer, emergency medical personnel or firefighter
  • The job includes responsibilities such as issuing payments, transferring money or entering contracts
WashingtonAn employer can’t check an applicant’s credit report unless the information is substantially job related or required by law.

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