Can an Employer Credit Check Hurt Your Score?

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Although it’s true that some employers check into the credit of current and prospective employees, this type of credit check cannot hurt your credit score. Other myths surround employer credit checks, so let’s dispel them.

First, know that employer credit checks are not legal in every state. Eleven states limit or prohibit employers’ use of credit information in employment decisions. They are California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont and Washington. In some states, an employer credit check is legal after a conditional job offer has been made or if the information sought is “substantially related” to the job being offered.

Credit score versus credit file

Myth: Employers can see your credit score.

Fact: Employers cannot access any version of your credit score.

When an employer checks your credit, he or she sees your credit file. Your score is not included. Furthermore, it is a special version of your credit file designed for viewing by employers. Account numbers are omitted, as are the applicant’s birth year and spouse’s name.

Ultimately, the data an employer sees depends on the type of report purchased. Some employers purchase a combination credit and background check and are able to see the applicant’s criminal record or other public information (such as insurance activity, driving record, weapons permits and professional licenses) along with his credit history.

Hard inquiry versus soft inquiry

Myth: Employer credit checks count as hard inquiries and cause the credit score to drop.

Fact: Employer credit checks are soft inquiries and do not affect your score.

All inquiries show up on your credit report. When you review your report, you’ll see a section listing all of the institutions that requested a copy of your file.

Hard inquiries – inquiries initiated by you when you apply for new credit (or for more credit from an existing creditor) – often cause your credit score to dip slightly. Too many hard inquiries can cause a creditor to reject your application for credit.

Soft inquiries, including checks by creditors pre-screening you (for credit card offers, for example), employer credit checks and self credit checks, do not affect your score at all.

Why employers check credit

Employers check credit for different reasons, but generally it is to look for patterns of bad decisions. Red flags might include high debt or shaky payment history. Those markers give the reviewer a sense that you might not be able to manage your financial life responsibly, which could translate to doubts about your ability to handle the job responsibly. If stability and financial maturity are important to the employer, the job or promotion may not be made available to a person who does not demonstrate those qualities in his or her personal life.

Some employers believe that they can mitigate the risk of future theft by avoiding employees with certain credit characteristics. Also, a credit report reveals liens and judgments against you, which could indicate a history of illegal or other untrustworthy behavior.

Note that an employer cannot legally discriminate against people who have filed for bankruptcy. However, many people who go through bankruptcy already have other negative items on their credit report, so this protection may not be terribly effective.

How employer credit checks work

To view your credit history, an employer must first have your explicit consent. A job application does not constitute implied permission to check your credit; you must sign (on paper or electronically) a separate form authorizing the credit check. If an employer checks your credit without your consent, report the incident immediately to the Federal Trade Commission.

With your permission, the employer can obtain your file from any provider in the credit reporting industry. There are dozens, if not hundreds, of companies that sell credit reports.

Employer credit checks often go farther back than lender credit checks. While a lender may focus on the last two years, for example, an employer might evaluate the last four or five years, or more.

An employer may exercise greater discretion than a lender in its evaluation. For example, a lender may look at the number of late payments a consumer has and simply reject the application if the number is too high. An employer, however, might consider the bigger picture, such as a number of late payments directly following a significant negative event (illness, layoff, divorce, etc.), and that the applicant quickly got all accounts caught up.

If a person is denied a job or promotion because of the employer’s credit check, the employer must notify the person of that fact and provide a copy of the credit report that was used and a notice called a “Summary of Rights” that explains how to contact the company that provided the report. Credit reports sometimes contain errors, and in some cases the errors are serious enough to result in an adverse decision. If an error is found on the report, follow the provider’s instructions to correct it and send an updated copy to the employer. Avoid the need to correct mistakes by checking your credit reports regularly.

Although an employer credit check can feel invasive, remember that not all negative items on a credit report have equal weight, and many employers are willing to listen to reasons and circumstances surrounding negative events.

Posted in Credit Score
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