Why would an employer look at your credit?

Employers sometimes check credit to get insight into a potential hire, including signs of financial distress that might indicate risk of theft or fraud. They don’t get your credit score, but instead see a modified version of your credit report.

Employer credit checks are more likely for jobs that involve a security clearance or access to money, sensitive consumer data or confidential company information. Such checks may also be done by your current employer before a promotion.

Here’s what you need to know about employer credit checks, including what information prospective employers can see, your rights, why the practice is controversial and how to present the best possible face.

Why would an employer look at your credit?

An applicant's credit history can flag potential problems an employer would want to avoid:

• Lots of late payments could indicate you’re not very organized and responsible, or don’t live up to agreements.
• Using lots of available credit or having excessive debt are markers of financial distress, which may be viewed as increasing the likelihood of theft or fraud.
• Any evidence of mishandling your own finances could indicate a poor fit for a job that involves being responsible for company money or consumer information.

What do employers see when checking your credit?

Potential employers see a modified version of your credit report, says Rod Griffin, senior director of public education and advocacy for Experian.

Here's what employers will see:

• Identifying information like your full name and address.
• Your credit accounts and your available credit.
• Your payment history.
• The parts of your employment or work history that you have self-reported on credit applications.
• Bankruptcies or liens.

Here's what employers won't see:

• Your credit score.
• Account numbers on your credit accounts.
• Your income.
• Medical bills.
• Any identifying information that could be used to discriminate, including your birth year, marital status, or race and ethnicity.

Does an employer credit check hurt your score?

Businesses may get an employer credit report from one of the three major credit reporting bureaus — Equifax, Experian and TransUnion — or may use a specialty screening company.

The credit check counts as a soft inquiry on your credit, so it won’t take points off your credit score, the way a credit card application might.

The credit report also won’t show other soft inquiries on your credit, so potential employers won’t be able to see if other employers have checked on you. But you will be able to see the soft inquiries if you request your own credit report.

What are your legal rights?

Notification and permission: An employer must notify you if it intends to check your credit and must get your written permission. The Fair Credit Reporting Act requires the notice to be “clear and conspicuous” and not mixed in with other language.

Warning before rejection: If an employer might reject you based somewhat or totally on your credit report, it must tell you before the decision is made. It has to send you a “pre-adverse action notice,” including a copy of the report used and a summary of your rights.

Time to respond: The employer must wait a reasonable period — usually three to five business days — before it proceeds. The goal is to let you explain the red flags on the report, or, if the negative information is incorrect, let you fix the mistakes with the reporting company.

Final notice, right to free copy: After it acts, the employer must follow up with a post-adverse action notice, giving the name of the credit report agency, its contact information and explaining your right to get a free copy of the report within 60 days.

Controversy around employer credit checks

Some states have limited the use of employer credit checks, including California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont and Washington.

Those who object to employer credit checks say that a worker's credit report has no bearing on their ability to perform most jobs. Moreover, critics say the practice harms workers — especially minority job seekers — because it can be an obstacle on the path toward economic stability.

"There are some significant racial disparities in credit history and credit scores," says Chi Chi Wu, a staff attorney at the National Consumer Law Center. "Studies show that Black and Latino consumers have lower credit scores as a group," she notes, citing reasons like the racial wealth gap and other forms of discrimination that make debt harder to pay off and easier to accrue.

"So, when you use credit history in employment [background checks], you are sort of baking that racial disparity into your decision process for job seekers," Wu says.

Those in favor say that credit checks offer employers information into a potential job candidate's judgment and decision-making that could impact their business in the future.

You can check with your state labor department or your city government to learn whether employer credit checks are restricted in your area.