Why Should You Care About Your Credit Standing? To Get a Job, For One Thing

Poor Credit RatingWhile everyone is probably more concerned with whipping their bodies into shape for beach season, it’s important to not forget about our credit scores as well.  That might sound a bit odd, but studies show the difference between an out-of-shape credit score and an excellent one can be hundreds of thousands of dollars over the course of your life.  Not only could we all use that money in this economy, but a bigger wallet might even attract more attention than a flat tummy.

Kidding aside, maximizing your credit standing is essential in this day and age.  In addition to the interest rates you’ll get on loans and lines of credit, your credit impacts the insurance premiums you pay, your ability to lease a car or rent an apartment, and even the jobs you’ll gain serious consideration for.

That last part is perhaps most significant, as good jobs are tough to come by these days and most of us need the cash.  As of last month, 7.5% of people is unemployed, according to the Bureau of Labor Statistics.  Outstanding student debt has surpassed $1 trillion.  And we’ve racked up more than $82 billion in new credit card debt in the past two years alone, as many try to stay afloat without much money coming in and others struggle to adjust to post-recession spending realities.

The number of employees referencing credit report data for hiring decisions has declined in recent years (see table below), but still nearly half do so.  You don’t want to be turned down for a job that you’re otherwise qualified for just because you make some mistakes managing your personal finances in the past and never fixed the damage done.

Employers: Do You Reference Credit Data for Hiring Decisions?


Employers: Reasons for Using Credit Data

We therefore sought the opinions of a few professors who’ve studied the credit scoring process in order to bring you some valuable insights into how employers utilize credit data in the current regulatory landscape as well as how reliable credit scores actually are.  You can check out what they had to say below, and then reference the tips that follow in order to make this summer a successful one for both your social life and your career.

Jill Ellingson – OSU

  • What do you make of the decline in employers conducting credit background checks on potential new hires?

Jill Ellingson-OSU

[It] depends on where you’re getting these numbers.  Certain states such as Massachusetts, Hawaii, and Illinois have placed tighter restrictions on employers regarding when and under what conditions these checks may be conducted.  These restrictions apply to even criminal checks.  This creates a difficult source of tension.

On one hand, an employer has a right to maintain a safe workplace, but on the other hand, an applicant has a right to fair treatment and deserves the chance to demonstrate their skills and abilities, even if they have a criminal history.  I don’t believe that the decline is indicative of employers feeling there is less need for conducting proper due diligence on job candidates.  The risk of negligent hiring and the harm that can result if one inadvertently hires someone who has purposefully misrepresented his/her credentials and experience is still very salient.

- Jill Ellingson, Associate Professor of Management & Human Resources in Ohio State University’s Fisher College of Business

John Sullivan - SFSU

First the formal implementation or even the discussion of legal issues especially in states like California has restricted its use. Second, so many more individuals have credit issues that checking may eliminate too large of a percentage of prospective candidates. Third, managers and recruiters have a little more empathy since many of them have themselves had credit problems. Fourth and the most important, there has been no definitive proof that credit reports accurately predict future performance.

- John Sullivan, Professor of Management in San Francisco State University’s College of Business

  • What do employers generally look for in applicants’ credit reports?  Is this information actually revealing, or is it more misleading than anything?

These can be revealing.  Credit checks should only be conducted when job relevant (e.g., cashier position, accountant position, Director of Finance).  If individuals have fiduciary responsibilities as part of their job, then credit checks can be informative.  Such checks can reveal elements of fiduciary integrity as well as highlighting the credit risk that a particular individual brings.  Individuals facing financial challenges may be more prone to take questionable or illegal actions in conjunction with their access to firm funds.

Can it be misleading?  There are examples of identity theft victims having problems with credit checks. It is my understanding that such folks can receive government documentation to provide to employers that confirms and clarifies their credit situation, even if public documents indicate otherwise.

- Jill Ellingson, OSU

Most credit reports are not requested until after hiring decision is made so recruiters are trying to guess what would be a knockout factor for the hiring manager in order to avoid there criticism. I have found no uniform approach. So unless it is a money related job, they are essentially looking for instability that may spill over into the job. Just like with legal issues, if it’s not a recent and relevant issue, it would not be enough to give up on a candidate that you have worked so hard to land.

- John Sullivan, SFSU

  • What potential legal issues / rights violations are involved with using credit report information for hiring purposes?

If the credit check is job relevant (i.e., directly evident of the knowledge, skills, and abilities required to do the job), then the legal implications are greatly lessened.  My sense is that employers tend to get into legal trouble when they start running credit checks in conjunction with other checks (e.g., education, criminal) more as habit than as the result of careful thought.  It is does as part of a screening checklist, independent of whether it is job-relevant.

- Jill Ellingson, OSU

Some states require you to tell the candidate when you reject them based on credit and no one likes to tell applicants why they are being rejected. There was always a concern for discrimination because different races may have different average levels of credit profiles.

- John Sullivan, SFSU

  • Nine states have limited the use of credit report information for hiring purposes, and other jurisdictions are considering doing so.  How will this ultimately play out?  Do you believe there will be federal legislation on the issue?

I would be surprised to see this issue taken up at the federal level. Most legal restrictions on specific HR practices (with the few obvious exceptions of discrimination, safety, and wages/work hours) have been legislated at the state level (e.g., access to your personnel file, refusing to hire smokers). I’d expect that this will remain a state issue, too.  This of course means that there will continue to be large variance among the states in terms of the nature of the limitations imposed.

- Jill Ellingson, OSU

With a do-nothing Congress, I don’t see this becoming a federal issue but I do see if spreading across more states because so many now have credit issues due to the economy. No one in your industry has made a convincing correlation between weak credit and unacceptable on-the-job performance.

- John Sullivan, SFSU

  • How can you enforce limitations on the use of credit report information for hiring purposes?  Couldn’t employers simply provide another excuse for not hiring someone and avoid sending “adverse action” letters?

This is the same issue that manifests when one discusses how you would enforce Title VII—wouldn’t an employer just give a “non-discriminatory” reason for hiring someone.  Could this happen and wouldn’t it be difficult to enforce? Sure.  But as with discrimination cases, where we saw cases built around firm history, I would expect a similar approach here.  Applicants communicate; employees communicate.

Information gets out and gets disseminated.  This doesn’t happen in a neat and orderly manner, and the proliferation of understanding around what a company may or may not be doing may take time. But, if a firm makes it a practice (and it must be a reasonably consistent practice in order to be viable) to use credit checks in an illegal manner when hiring for jobs, I would expect that limitations can be enforced in such cases.

- Jill Ellingson, OSU

Most people in HR don’t have the guts to do that. It’s easier just to avoid the issue altogether. Most in recruiting simply don’t want bad references of any kind because it means they have to reopen the search. That’s why they don’t take it seriously or spend much money on it.

- John Sullivan, SFSU

  • Is a credit card an accurate indicator of one’s fiscal responsibility?  What else does it say about a person?

Martha Doran - SDSU

As an indicator, I would say yes. The FICO scores are indicative of how good a job someone does in paying bills. People just have to know or remember how the scores are weighted.  Some weight is given for how long you have had a credit history so you are more of a perceived risk when you first start out. And if you are taking on more credit (more inquiries) you can also see your score dip, since this is deemed an indicator of more risk. Not only banks and credit card companies but also landlords believe the score says something about a person’s ability to pay bills on time, a kind of responsibility score perhaps.

- Martha Doran, Associate Professor of Accountancy in San Diego State University’s College of Business Administration

  • How would you characterize the importance of having good (or excellent) credit in this day and age?

Good credit scores just make your financial life easier to manuever. If you need a car or want to move to a new apartment or get a new job (all of which may require a credit report) its just quicker, easier and usually a more positive answer if your credit is good. If not, then you need to pay higher rates, deal with secondary lenders, ask parents to co-sign…none of which are quick or satisfying solutions.

- Martha Doran, SDSU

  • Are credit scores fair?

Yes and no….Yes, these scores give a relatively accurate view of key factors , especially the ability to make timely payments and to wisely use credit. No, because there are exceptions to the results of what shows on paper (messy divorces with one party unaware of what was going on, one time period filled with many poor decisions, etc.) But I have seen and helped counsel folks in these situations so that with transparency to lenders, and some time to get the credit house in order, people can regain a good credit rating.

So I think they are fairly accurate and relatively fair.Some lenders are now saying that the scores actually help reduce the costs of lending, thus giving people better rates and more access to credit, if they are deemed capable of handling it well!

- Martha Doran, SDSU

Tips for Improving Your Credit Standing

Before we get to the specific tips, it’s important to touch on a few nuances related to credit scores and reports.  (You can also read more about this in CardHub’s Education Center).

Credit scores are numerical manifestations of your financial responsibility based on information in your major credit reports and determined using a variety of different metrics.  No one has just one credit score, however, as there are a number of different scores out there and lenders/employers use different ones – often customized with proprietary models.  It’s difficult to determine which score a particular decision maker will use, and you also have to pay to see a given credit score.

That’s why it’s both costly and inefficient to try to check your actual credit score.  A better approach is to leverage your right to a free copy of each of your major credit reports (i.e. Experian, Equifax, and TransUnion) every 12 months.  This will enable you to evaluate the extent and nature of your credit history as well as parse your file for inaccurate information that might drag your credit standing down.  Your credit standing is essentially whether you have excellent, good, average, or limited credit, based on your credit data and irrespective of the numerical range of scores used by a particular credit scoring agency.

With that said, your credit building priority should be to infuse your credit files with a steady stream of positive information that can devalue any negative information from your past or simply build out a thin history.  Here’s how to go about doing that.

  1. Open a Credit Card Account:  A credit card is the most efficient and accessible credit building vehicle for the average consumer, as it will relay usage information to the major credit bureaus on a monthly basis.
  2. Get a Secured Card If Need Be:  Should you find yourself unable to get a “normal” – or “unsecured” – credit card, your best bet is to open a secured card.  Secured credit cards are typically easier to get because users are required to place a refundable security deposit (usually a minimum of $200) that will serve as their credit line and reduce risk for issuers.  They report to the credit bureaus in the exact same manner as unsecured cards.
  3. Pay Your Bill On Time Every Month:  Late payments will be noted on your credit files and will hurt your credit standing.
  4. Keep Your Credit Utilization Low:  Maxing out your credit cards every month reflects negatively upon you, so it’s best to only use about 50% of your available credit.
  5. Lock Your Card In a Drawer If Necessary:  You don’t need to actually use a credit card for it to benefit your credit standing.  As long as your account is in good standing (and you pay for any purchases you make on time), the information being relayed to the credit bureaus every month will be positive.
  6. Maximize Your Available Credit:  Raising your credit line is easy with a secured card; you simply add to your security deposit, and you can do so at any time.  If you have an unsecured card, you can ask the issuer to increase your spending limit or look into opening another account (which will increase your aggregate available credit).
  7. Avoid Inquiries Before Your Credit Goes on Display:  If you plan to apply for a job or take out a loan in the next six months or so, you might not want to apply for a new credit card.  Every time you do so, your credit takes a slight dip for a few months.

So, take these tips to heart and develop a workout regimen for your credit standing.  Pretty soon, you’ll have one less thing to worry about and a lot more money in your pockets.

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Our content is intended for general educational purposes and should not be relied upon as the sole basis for managing your finances. Furthermore, the materials on this website do not constitute legal advice and should not be relied upon as such. If you have any legal questions, please consult an attorney. Please let us know if you have any questions or suggestions.