If an employer requires a credit check before you are hired, you might assume it means taking a look at your credit score, a three-digit number that gauges the probability that you will repay borrowed money.
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Actually, the employer won’t see your score — but it’s possible that someone will look at your credit report.
Confused? Here’s what’s happening:
A credit report and a credit score are two different things
Your credit report lists information about your past and present credit accounts. This includes which ones are in good standing (meaning you’ve paid on time and the amount due) and which ones aren’t (meaning you’ve missed or made late payments, or have been sent to collections). You have one credit report from each of the three major credit bureaus; the bureaus build the reports on account information they get from your lenders, usually on a monthly basis.
A credit score is a three-digit number that’s derived from the information on your credit reports. The most commonly used credit score in the U.S. is the FICO score. Its main competitor is the VantageScore. Both generally range from 300 to 850, although some newer versions of the scoring algorithms go above 850. Higher is better, and positive information on your credit report — like on-time payments and low balances on revolving credit accounts — will help drive your credit score up. Conversely, if you have late payments, accounts in collections and maxed-out credit card accounts, your score will drop.
So now we’re back to your employer. Contrary to popular belief, your current or future employer won’t look at your credit score — that metric is meant for lenders. However, an employer may want to check your credit report.
Employers get a shortened version of your credit report that excludes any information that would violate equal employment opportunity laws, explains Rod Griffin, director of public education for credit bureau Experian. An employer report also does not list “soft” inquiries, which do show up on the report an individual receives.
Why would an employer want to look at your credit report?
In general, your credit history is considered a reflection of your overall level of trustworthiness and responsibility. As a result, some employers want to review your credit report before extending you a job offer — and this is more common than you might think.
According to a 2012 survey conducted by the Society for Human Resource Management, 47% of employers check potential employees’ credit reports as part of the hiring process. The same study found that the two most common reasons for reviewing job candidates’ credit reports are to decrease the likelihood of theft and embezzlement and reduce legal liability for negligent hiring. According to an article in The New York Times, which cited the same survey:
“Most businesses use credit checks only to screen for certain positions, but one in eight, the survey found, does a credit check before every hire.”
But it’s important to remember that an employer can’t check your credit report without your consent; you must give written permission. Also, an employer won’t be seeing personal information, like your account numbers; a modified version of your report is provided to protect your privacy.
Also, 11 states have laws prohibiting employer credit checks and/or restricting how this information can be used in the hiring process. If you live in one of these states, an employer credit check may not be something you need to worry about.
Finally, if your employer does pull your credit report, you won’t need to be concerned about losing points from your credit score. It counts as a soft inquiry, so you won’t experience the temporary loss of points that, say, a credit card application would cause.
Keep your report and score in good shape
If you’re concerned about what an employer would find on your credit report, you may be relieved to know that the Society for Human Resource Management study found that 80% of employers who checked reports still hired candidates with negative marks on their credit.
But that doesn’t mean you should take this matter lightly. Doing everything you can to keep your credit report in good condition is a smart financial move, one that should protect your credit score, too. The best ways to keeping your credit report and score in top shape:
- Pay your bills on time.
- When it comes to plastic, don’t use more than 30% of your available credit on any card at any time (and less is better).
- Get started with using credit as soon as you can, because the length of your credit history affects your score.
- Only apply for credit that you really need, and be sure to put a few months of space between your applications for new credit cards.
- Monitor your credit report regularly. Some personal finance websites, such as NerdWallet, offer free credit report information as part of a free credit score service. That gives you access more frequently than the once-a-year reports direct from the bureaus. If you spot errors, take steps to have them corrected.
This post updated Nov. 4, 2016.