Employment Credit Check Conundrum

Following the Great Recession, are credit checks really fair?

The debate over whether employers should run credit checks has been a hot topic for years, particularly following the Great Recession.  Advocates say a credit check allows employers to assess your ability to handle money responsibly, while detractors say it’s really a form of discrimination that prevents low and middle income families struggling to get ahead from getting the good jobs that would help them do that.

Many states are enacting policies that restrict employer access to consumer credit reports. As you can see from the map above, 11 states have regulations restricting employers from running checks, while 11 more have restrictions pending legislative approval.

Are employment credit checks fair?

The main issue with employee credit checks given today’s economy is that millions of Americans face challenges with credit that are simply beyond their control. In past decades, bad credit was thought to mean you’d been irresponsible with your money – you’d maxed out credit cards from overspending or took on too much debt trying to live a lavish lifestyle.

However – whether that was true or not in the past – it’s certainly not true in today’s financial landscape. Medical debt accounts for 50% of the debts in collections. Often these bills pass into collections due to gaps in insurance coverage, and a consumer may not know that they owe the debt. Students graduating from college are doing so with record levels of debt – driving up their credit utilization, which is a key factor in credit score calculation. For homeowners, many lost all of their equity and mortgages went into the red following the real estate market collapse.

Melanie Geddes of LifeNet4Families explained to Consolidated Credit earlier this year during our Financial Literacy conference, low-income families who are struggling to make ends meet often don’t have the luxury of maintaining a good credit score due to their circumstances. “Some people don’t have any credit or they have bad credit because of a lot of choices that they’ve had to make – not because of bad choices, but just because of life circumstances.”

Essentially, many low and middle income families during the recession were making the choice between paying their mortgage and credit card bills, versus keeping the lights on and feeding their family that month. Rejecting a job candidate for making those hard choices is why this issue generates so much passion from dissenters.

Are employment credit checks relevant?

While credit checks by employers certainly don’t seem to be fair in today’s economy, the next question is, are they relevant?

“For jobs where an employee is handling money or credit you can see some cause for running a credit check,” says Gary Herman, President of Consolidated Credit. “If a person can’t manage their own money and credit, how can a company expect them to manage the company’s finances effectively or use company credit responsibly? There may be reason there for a check to be relevant.”

This is the main argument that proponents of credit checks argue for, but it would seem like that would only apply in specific circumstances for certain positions, rather than implementing credit checks company-wide for all positions. What’s more, past credit challenges are often hard lessons learned that help an individual grow.

“Our credit counselors have a range of different experiences with credit,” Herman acknowledges, “some have been credit-savvy their entire lives, but others have personally faced the same challenges that the people we help face. This doesn’t make them worse at their jobs. In fact, it often makes them better because they can empathize with the situations that their clients are struggling to overcome.”

Take Erick R., a certified credit counselor for Consolidated Credit. When he was hired as a customer service representative he had $14,000 in credit card debt and a 670 FICO score after being unemployed for six months.

“Once I started working here, I learned about counseling and personal finance and realized that it works. I decided to put my accounts into the program. By enrolling, I was able to pay down my credit cards, my debt ratio was lower and that actually boosted my credit score. So I’m living proof that the program does work.”

Overcome bad credit during a background check

If you have bad credit and you’re looking for a job, be aware that companies are required by law to get your authorization to run a credit check. So after you move from the interview phase into the background check part of the hiring process pay attention to what they ask you or have you sign-off to authorize. If a credit check is included, be upfront about the challenges you face BEFORE they check your credit report.

“Keep in mind that an employer doesn’t check your credit score,” Herman clarifies. “They are legally allowed to check your credit report. In doing so, they will see any negative items caused by your financial circumstances over the past seven years. So if you have negative item in your report, be prepared to explain them so a prospective employer has the full story.”

You can check your credit report for free once every twelve months through annualcreditreport.com. If you’re in the middle of a job search or planning to search for a new position soon, you may consider checking your credit report to see what it says so you know what prospective employers will see. That way you can either inform them ahead of time of any red flags and why they occurred or have explanations ready when they come back to you with questions.

For more tips on improving your chances of getting hired in spite of challenges with your credit, visit Consolidated Credit’s Guide to Overcoming Employment Challenges.

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