The mass confusion surrounding the question of whether or not employers use credit scores in employment screening begins and ends with the way the terms “credit report” and “credit score” are repeatedly used interchangeably in the media, online and even within the consumer credit industry.
So, step one: clarify the difference between the two items.
Credit Reports vs. Credit Scores: There’s A Difference
A credit report is a detailed summary of a consumer’s credit history and is compiled from the data on file at each of the three major credit reporting agencies: Equifax, Experian and TransUnion. This data is reported by lenders and other third-party data furnishers, and doesn’t become an actual credit report until a lender or other authorized entity requests the information from the credit reporting agencies.
Credit reports include a consumer’s personal identifying information, detailed account information and payment history, third-party collections, public records (judgments, liens, bankruptcy), and inquiries. Credit reports are not credit scores. A credit score is a three-digit numerical representation of a borrower’s creditworthiness, and is based on the information contained in your credit report.
Credit scores are designed to predict the likelihood of a borrower going 90 days past due over the next 24 months and are sold as an add-on product with a consumer’s credit report whenever a lender or other authorized entity requests them from the credit reporting agencies. Credit scores are not a static part of a consumer’s credit report and are generated from scoring software installed at the credit reporting agencies. Credit scores are not credit reports.
Employment Screening & Federal Law
Section 604 of the Fair Credit Reporting Act defines who has the right to access your credit report and according to the law, it’s perfectly legal for the credit reporting agencies to supply credit reports to employers for employment screening purposes.
Even though some states have passed legislation that limits when credit reports can be used for employment purposes, it’s completely legal in most states under Federal law. However, before an employer (or potential employer) can access your credit report you must first grant them written permission to do so.
MYTH: Employers Use Credit Scores to Determine Employment Eligibility
FACT: Employers do not use credit scores and all three credit bureaus and their trade association have gone on record several times confirming as such.
However, employers can (and often do) use your credit reports for employment screening purposes. This is where the terms “credit scores” and “credit reports” are often confused and used interchangeably as if they were the same thing, which they are not.
Even though some states have passed legislation that somewhat restricts when credit reports are used, the practice of using credit reports for employment screening purposes is still legal. In fact, under the Fair Credit Reporting Act, employers have permissible purpose to obtain your credit report information, but you must first grant them prior authorization to do so.
Special Reports For Employers
Credit reports used by employers are not like the credit reports that are sold to lenders. They’re specially designed for employers and are specific to employment screening. This is an important distinction because employment specific credit reports do NOT include credit scores.
Despite the fact that all three of the credit reporting agencies have gone on record stating that they do not provide credit scores to employers, many media outlets and even credit industry executives have erroneously stated otherwise.
The problem is that media and industry spokespersons are using credit reports and credit scores interchangeably, as though they are one in the same — which they’re not, and this only perpetuates the confusion around credit scores and employment screenings.
What Are Employers Looking For In A Credit Check, Exactly?
It depends on the employer, but according to the Society for Human Resource Management events that went to collections or involved litigation are taken the most seriously, mainly because they may be an indicator of bad judgment or irresponsibility.
The report also found that most employers will only go back as far as four years in a credit report. More than likely, they will pull a comprehensive consumer background check that includes your employment history, and credit history.
Your best bet is to know what’s in your reports before your employer does and dispute any errors as soon as you find them. You are entitled to a free copy of your consumer background file through First Advantage; and your free credit report is available once every 12 months at AnnualCreditReport.com.
If you have some smudges in your credit report, disclose the events when you are asked for approval to pull your report, so you can explain the event in your own words, and eliminate surprises. Depending on the employer, the event may not be an issue.
If an employer does decline you for a job because of information in your credit report, they are legally required to notify you of that fact, and disclose where you can get a copy of the same information. Provided you obtain the report within 60 days of that notification, you can access the information for free.
If the information in the report isn’t accurate, you can dispute it with the employer, but they don’t have to reconsider you for the job based on your argument. Regardless, you should take steps to fix the error with the reporting bureau so it doesn’t prevent you from getting future jobs.