Looking for a Job? Check Your Credit Report First.
Companies often rely on them for hiring decisions, but yours could have errors that prevent you from getting an offer. Here’s how to get ahead of a problem.
Two years ago when Emma Alda was offered a new job in accounting, contingent on passing her background and credit check, she was so excited and confident that she didn’t think twice about giving two weeks’ notice to her then-employer.
So Alda was surprised and devastated when she heard back from the new company that there was a problem with her credit report so significant that it put the offer in jeopardy. She thought there had to be a mistake.
Turns out, Alda was right: One of her credit reports showed that a local hospital had made a “hard pull” credit inquiry—the kind done when you apply for a loan—almost a dozen times, when she had merely applied for a payment plan. It was the hospital’s error. But by the time Alda identified the problem and got it fixed, the damage was done: The company had already hired someone else.
“I never would have thought that anything would come up preventing my position from being secured,” says Alda, a mother of three who now faced unemployment. “I had already received the job offer in writing.”
Credit reports were developed to help lenders assess risk on a loan, not to help choose a dog walker.
“Just as the economy is opening back up and companies are looking to hire, some people will face the harsh reality of being denied a job because of a mistake on their credit report,” Ejaz says.
To be sure, credit reports are just one part of a background screening, which can involve different types of checks, depending on the position a company is hiring for, says Melissa Sorenson, PBSA executive director. “Most employers include some form of a criminal history check,” she says, and that can include “education verification, employment history, driving record history, and more. Social media searches have gained in popularity in recent years as well for some positions.”
Bad Credit Doesn’t Mean a Bad Employee
One problem with the use of credit reports in employment screening, consumer advocates say, is that they weren’t developed to predict how well a person might perform in a certain job—and no one CR spoke with is able to produce a study or data that suggest otherwise. Yet employers often rely on credit reports when hiring for all sorts of jobs, says Amy Traub, associate director at Demos, a policy and research organization, where she focuses on consumer financial issues. Traub has testified before state legislative bodies on this topic.
For example, Traub says her research shows that companies check credit reports when hiring in information technology, for those who drive delivery trucks, and even for dog walkers.
“We know credit reports were developed to help lenders assess risk on a loan, not to help choose a dog walker,” Traub says, “yet they’ve been marketed by credit bureaus and background screening companies as a way to evaluate a person’s character and trustworthiness.” But, she says, a credit report “is not a crystal ball.”
The practice is so questionable that almost a dozen states heavily curtail it in most circumstances, according to research at Demos. For example, in Colorado, the law limits what credit information companies may request unless it’s substantially related to the employee’s current or potential job, including jobs at banks or other financial institutions, in law enforcement, or that entail handling financial information.
Other states that curtail the practice include California, Connecticut, Delaware, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont, and Washington, along with the cities of Chicago and New York.
A bill that passed in the U.S. House of Representatives in January 2020 but died in the Senate would have, among other financial reforms, essentially banned the practice except where required by law or for jobs requiring national security clearance. The Equal Employment for All Act, a bill introduced in the House earlier this year by Rep. Steve Cohen, D-Tenn., would do the same.
Credit Reports and Discrimination
One of the most troubling aspects of using credit reports to predict a person’s ability to do a job is that higher rates of people in communities of color and in low-income neighborhoods have no credit history and thus no credit report. This is true of about 15 percent of Blacks and Hispanics vs. 9 percent of whites, according to figures from the Consumer Financial Protection Bureau.
Also problematic for a job seeker is having what’s known as a “thin file”—one that has too little information in it to even generate a credit score. This is a situation also disproportionately faced by people of color. In a recent analysis of those with thin files, the Urban Institute, a social and economic policy research group, found that 32 percent of Black people vs. 18 percent of whites have thin files.
Either situation—not having a credit report or having a thin one—may hurt a person’s chances of being hired, says Linda Jun, a senior policy counsel for consumer finance at Americans for Financial Reform, a consumer advocacy organization.
Common errors can seem minor but could in fact hinder you from being considered for a job or promotion.
Of course, being unemployed can negatively affect any credit report you do have if it causes you to make late payments or have bills go to collections—a situation Traub says is all too common in Black and Hispanic communities and lessens the likelihood they can land a job.
Here we explain how to protect yourself and what you can do if a job offer or promotion is rescinded based on your credit report or other items in your background screening.
Before You Apply
Be aware that a company must first get your permission in writing to run a credit check and background screening, says Mark Mailman, an attorney at the Francis Mailman Soumilas law firm in Philadelphia who specializes in consumer protection law. Still, it’s smart to take these preemptive steps, so you’re aware of what any potential employer might find.
Check Your Credit Report
You can pull free reports weekly from each of the big three credit bureaus—Equifax, Experian, and TransUnion—at AnnualCreditReport.com. Be ready to answer a series of potentially challenging security questions—some of the volunteers in CR’s study said they were stumped by them and thus locked out of their reports. Some said they had to request their report in writing.
Checking her credit report ahead of applying for a new job might have helped Emma Alda, who went on to co-found an online fish-care company. “I thought I had the job,” she says. She now keeps a close watch on her credit.
Dispute Any Errors You Find
Because credit reports may include information about your employment history, this includes asking to have companies mistakenly listed that you never actually worked for removed, says CR’s Ejaz. Some people who volunteered for CR’s study said they found companies named in their credit report that they didn’t recognize and had no connection to.
Disputes are best done by describing the issue in your own words in a letter sent via certified mail along with any additional supporting documentation. This is to help create a paper trail in case you need to take legal action against a credit bureau if it refuses to correct an error or fails to follow federal guidelines on addressing your dispute. This process could take up to 30 days and possibly longer if the dispute is complex, Mailman says.
Consider Adding Previous Employers to Your Report
That’s because some companies may double-check your resume against the companies listed as previous employers in your credit report. You can ask to have this information added in the same way you file a dispute, by certified letter.
Include a Personal Statement
In your own words, you can submit to each of the three main credit agencies any information that might help explain an obvious issue on your report. Perhaps you’re in the middle of disputing something, but it’s taking several months—you could add a note saying as much. Or if you lost a dispute but want to explain that a 30-day late payment happened because there was a death in your family, say, you can take the opportunity to provide this context.
These statements are automatically attached to your credit report for anyone who views it to read and can put any errors into context or explain the attempts you made to correct it, says Bruce McClary, senior vice president of communications for the National Foundation for Credit Counseling, an organization that helps consumers improve their financial profile. With Experian, a statement will stay on your report for up to 24 months unless you remove it. TransUnion and Equifax say the statements will stay on your report until you apply to have them removed.
If You Are Denied a Job or Promotion
The Fair Credit Reporting Act (FCRA) governs how most of this process works, Mailman says, and companies are obliged to follow federal law. Some states may have more restrictive laws. For the most part, as Alda learned, companies do not have to hold open the position while you take steps to explain or correct mistakes or items on your report, Sorenson says.
That said, they do have to follow certain procedural steps, Mailman says. For starters, a company must notify you of the possibility that they’re about to take an adverse action based on something in your credit or background file—called a “preliminary notice of adverse action.”
Alda was contacted by her potential employer by phone about the adverse finding, but not all employers play by the rules. In 2015, Uber driver Abdul Mohamed, was suddenly cut off from the driver app—so he could no longer pick up passengers. He later learned it was at least in part because of an item the company identified in his credit file, which triggered Uber to essentially fire him without warning. Mohamed brought a class-action suit against Uber claiming the company violated the FCRA by not giving him advance notice. The suit has since been settled.
If you’ve been given notice of an adverse action, consider the following steps.
Get a Copy of the Report and the Name of the Screening Company That Provided It
If an employer or potential employer notifies you of an “adverse action” it intends to take, it must also give you a copy of the report it used to make its decision and notify you of your rights under the FCRA, says Jun, at Americans for Financial Reform.
Try to Determine What Triggered the Possible Action
Under federal law a company does not have to explain or identify what specific information in your report triggered the possible adverse action, Mailman says. Often it’s obvious, he says, particularly if it’s based on an error, as in Alda’s case. But there are situations in which “you may not know what made someone not want to hire you,” Traub says. “It can be completely arbitrary and potentially discriminatory.” Still, Mailman suggests asking for any specifics, knowing the employer may not provide them.
Prepare an Explanation
A company must provide a reasonable amount of time for you to explain the issue—assuming you know what it is—or get the mistake resolved, Mailman says. But how much time is not carved in stone: Alda wasn’t given a specific amount of time—she says it was implied that she would get back to them in a day or two. Mailman says previous cases suggest that between three and five days is the usual amount of time you have before the company is free to hire someone else.
Weigh Privacy Concerns
One problem with providing an explanation is that you may need to offer personal details you’d rather wish to conceal, Jun says. That can include personal medical information if you have medical debt, or the financial details of a divorce or bankruptcy—neither of which you’d have to divulge when simply interviewing for a job. If the job isn’t worth the privacy invasion, you might want to keep your personal business to yourself.
Feel Your Rights Were Violated?
Under the FCRA, consumers have the right to sue a credit agency, or even an employer, if you can prove it negligently or willfully failed to follow the FCRA. In some instances with complicated report errors that involve identity mix-ups, hiring an attorney may also be your best resort, Mailman says. If you sue and prevail, your attorney costs are paid for.