How Employers Use Credit Reports

One of the most objectionable uses of credit reports is their use by employers for pre-employment and continued employment screening of job applicants and current employees.  It’s especially controversial if protected classes are disparately impacted by the practice.  And while no hard evidence exists that proves there is a disparate impact, the Equal Employment Opportunity Commission just sued Kaplan Higher Education Corporation for alleged discriminatory use of credit reports for hiring purposes.

The lawsuit alleges “an unlawful discriminatory impact” on African American applicants.  And while Federal law (The Fair Credit Reporting Act) still allows the practice of using credit reports for employment screening, the hiring company cannot use credit reports to disqualify groups of people, regardless of intent.  It’s important to note that employers do not use credit scores and I wrote about this credit scoring myth here.

The EEOC’s lawsuit, while in its infancy, begs several questions about the practice of using credit reports for employment screening.  They are…

• Does every employer screen their applicants’ credit reports?
• Are the rules governing the use of credit reports by employers different than those that govern their use by lenders?
• What exactly are employers looking for on credit reports?
• How can job applicants overcome credit barriers?

Not all employers use credit reports for employment screening and those that do don’t screen credit reports for all of their applicants.  The practice seems to be reserved for positions that either require access to money or sensitive information, but that isn’t exhaustive of all situations where credit screening is used.  They’re looking for signs of irresponsibility, which can be gleaned by the amount of delinquent debt on your credit reports.  And finally, outstanding judgments can also be problematic because of the possibility that they’ll become garnishments and unwillingly drag your employer into your debt situation.

The rule governing the use of credit reports for employment screening do differ than the rules governing their use in lending.  First off, the employer must get your express and overt permission before access your credit files.  The same type of permission is not required by lenders as long as they have a reason to believe you’re asking for some sort of credit benefit.  For example, when was the last time you signed any sort of credit application when you asked for a credit limit increase or applied for a public utility?

Additionally, if you have public records on your credit report that fact must be disclosed to you proactively.  When you apply for a loan with a bank or insurance with an insurance company they don’t have to tell you what’s on your credit reports.  Also, the inquiry posted on your credit report when you apply for a loan is viewable by other lenders.  When you apply for a job the employment inquiry cannot be seen by anyone other than you.

It’s rare that employers are so bold as to publically disclose their policies with respect to their credit screening “breaking point.”  There is also no industry wide standard set of policies regarding how bad your credit has to be before it will cost you a job.  This is why nobody knows “the rules” going in to the interview process.  And, it’s also why nobody knows the right way to handle the impending “credit problems” discussion.

There are some who believe you should not give the employer permission to pull credit if you have something to hide.  The problem with that strategy is that, well, you look like you have something to hide.  And with dozens of applicants for every job opening it’s easy to move on to the next resume.

I think the better tactic would be to get deep into the interview process and, when credit comes up, overtly disclose any issues that are plaguing your credit reports and offer an explanation. You won’t have the opportunity to offer an explanation after you’ve been disqualified, and even if you are it’ll likely be futile at that point.  At least this way you are controlling the conversation as best you can.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit contributor for Mint.com, and the author of the “credit rating” definition on Wikipedia.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  He has served as a credit expert witness in more than 70 cases and has been qualified to testify in both Federal and State court on the topic of consumer credit.

Categorised in: Credit Monitoring, Credit Report, Credit Score, Employment, Money & Identity, Uncategorized

This post was written by John Ulzheimer