Are employers truly weeding out applicants by checking potential employee credit reports? The reality may surprise you
Competition for decent jobs is fierce these days, but are employers weeding out undesirables by analyzing every applicant’s credit report? Forget what you think you know about employers’ credit check process — the reality may surprise you.
Myth No. 1: Most employers pull all applicant’s reports.If you do have credit problems, you just may be safe from scrutiny. The 2010 Society for Human Resource Management report, “Background Checking: The Implications of Credit Background Checks on Hiring Decisions,” found that while almost six in 10 organizations pull credit reports on at least some candidates, only 13 percent check them all.
“Typically the credit check is not for all jobs,” says Tony Deblauwe, founder of the human resource consultancy company HR4Change, and author of “Tangling with Tyrants: Managing the Balance of Power at Work.” “Usually there has to be a reason, such as the job is in finance, or an executive level job with profit and loss responsibility.”
Companies with a universal credit-pulling approach have specific reasons for their policy. For example, Christopher Desbarres is president of Help Unlimited, which helps individuals manage their personal finances, and says his company checks all prospective employee’s reports because of the nature of the business — intimately dealing with other people’s cash and accounts.
Desbarres does say, however, that credit checks are only pulled after the decision to hire. “It should be one of, if not the, last things you check. Otherwise, you are wasting time and money. It is not a good tool for weeding out potential applicants.”
Truth: While many prospective employers check some, few check all — and even then, it’s usually for specific reasons.
Myth No. 2: Employers and lenders look for the same information.
While lenders place strong emphasis on credit reports, Deblauwe says that it’s only a small part of an employer’s holistic evaluation. Your credit report could be a show-stopper, though, when what’s on it causes doubt about your ability to handle and manage corporate assets, such as debt that went into collections or litigation.
And unlike lenders, employers don’t check credit scores, but they may access a comprehensive background report, such as the ones available on LexisNexis. Along with your credit history, it lists data such as your past employment, insurance and legal activity. You’re entitled to one of these reports free per year, so if you’re job hunting, pull the reports.
Also, employers tend to make longer term assessments than their banking counterparts. The Human Resource Management report found that most organizations focus on credit history of four to seven years overall. Consequently, even if you’ve improved your credit lately, you may still have to explain indiscretions from bygone years to the person making hiring decisions.
Truth: Employers take a longer view on your credit past.
Myth No. 3: Poor credit will immediately disqualify you.
So if you have bad credit, will your resume be tossed? Doubtful, says Tom Armour, co-founder of HighReturnSelection.com, a company that teaches businesses how to improve their hiring process. One reason, he says, is that decision-makers are often unclear about how to read credit reports and rarely know how to apply what they do see.
“In the last number of years I have asked my staff, the recruiters, if they can read and understand a credit report and how that information can be used in the hiring decision,” says Armour. “Their answers are always very weak and unless they see a bankruptcy in the report, they do nothing with it.”
Another reason less-than-ideal credit is unlikely to impair your being hired is because so many successful people have had financial problems. “I once observed a fellow who had gone bankrupt being hired for a key financial role,” says Armour. “He was brilliant, and the company felt the bankruptcy was a life learning event.”
Attorney Sonya Smith-Valentine, credit reporting expert and author of the forthcoming book “How to Have a Love Affair with Your Credit Report” agrees, saying many people over worry about their reports. “One blemish won’t disqualify you. Employers aren’t expecting it to be 100 percent perfect.”
Truth: Your checkered credit history may be ignored.
Myth No. 4: Employers use credit checks to discriminate.
According to Smith-Valentine, a driving force behind credit checks is litigation protection. “If an employee does something allegedly wrong and they get sued, the attorney will get their file,” says Smith-Valentine. “If the company did not do an appropriate background check, they can use it at trial.”
The Human Resource Management report affirms Smith-Valentine’s assertions: Companies conduct credit background checks most often to offset theft and embezzlement, and after that to reduce liability for negligent hiring.
“The reason I check credit is that employees of our foundation are representatives of our founders, and we each have a fiduciary responsibility,” says TyAnn Osborn, director of human resources for the the Michael and Susan Dell Foundation. “I’d rather be in the position of not hiring someone because of what I found than having to explain why I did, and they did something wrong.”
Be aware though, that in the future, companies may even be prohibited from accessing your report at all if a bill currently in Congress — the Equal Employment For All Act — becomes law. The bill would amend the Fair Credit Reporting Act to limit employers’ ability to check credit reports and to use them against prospective and current employees.
Truth: Employers pull reports to protect themselves.
Myth No. 5: All negative information is bad. Truth: Some is more alarming than others.
While a lender may balk at a skipped credit card payment, the Human Resource Management report found that employers are most negative about you being sued for a debt and that results in a monetary judgment (a concern because there could be wage garnishments they would have to deal with) Next worst? Not paying your bills and having them land in collection.
“One late payment to Columbia House Music back in 1988 doesn’t concern me; however, I did have a candidate with multiple foreclosures and a string of late payments,” says Osborn. “Over a period of time, it represented a series of poor decisions and lack of judgment. That did concern me, and ultimately we did not extend an offer.”
Large, outstanding balances can be adverse too. “I am interested in the applicant’s ability to pay their debt based on the salary that I am going to offer,” says Desbarres. If their monthly payments are too big, “that’s a sign of financial duress and a risk factor for committing financial exploitation.”
Truth: Some credit report information is more alarming than others.
Myth No. 6: Employers don’t care about your reasons for having bad credit.
Prior to your credit report being checked (and you’ll know, as you have to give permission), disclose problems quickly. Eighty-seven percent of organizations report that they allow job candidates, in certain circumstances, the chance to explain results, according to the Human Resource Management study.
“It’s much better that I hear any potential derogatory information from the applicant. I’m going to find out about it anyway, and if I feel that you are trying to hide it from me, then I am going to wonder what else you are hiding,” says Desbarres.
Solid explanations help, assures Desbarres. “Sometimes unfortunate things happen to good people. If you can give me a plausible explanation about why this derogatory information should not be a cause for concern, I’m more than happy to hear it. Remember, I’ve already made the decision that I want to hire you!”
Truth: They care a lot.
Finally, if you have fabulous credit and are counting on it giving you an edge, forget about it. A mere 9 percent of recruiters said that a positive credit background check is an influential factor in hiring decisions. It’s nice, but the candidate with the firmer handshake and superior credentials will probably join the payroll.
See related: Resources for people with bad credit, Credit checks for job applicants become more common, States weigh limits on credit checks for employment, States stepping up to limit pre-employment credit checks