Should a credit check be allowed or required by an employer? Perhaps. However, times are so difficult already for millions during a pandemic, legislation might outlaw such a thing.
Further, after the economy collapsed in 2008-2010, it's not uncommon for people to have lost their homes to foreclosure or short-sale. One's credit score usually gets demolished by 200 points or more, and stays that way for 3 years or longer.
A Credit Check After A Foreclosure
One of my close friends named Tom, decided to follow through on my getting laid off plan because he's burnt out and no longer has the desire to work in software sales anymore. He's got enough income saved up to last him for about 2 years if he maintains his current lifestyle, which is not lavish by any means.
If Tom successfully engineers his lay off, he wants to travel for 6 months, and then see if he can find a job in sales at one of the big internet/tech companies such as SalesForce or Google.
Given his income will literally go to 0, except for his 6 months severance, and $1,800/month in unemployment benefits, he no longer wants to keep paying for his underwater condo he bought at the top of the market.
Tom's payment is around $4,500 a month (includes property taxes and HOA), which was digestable when he was making $10,000 a month after taxes. But now that he has barely any income, he finds it a big waste to spend so much to live in a 2 bedroom, 2 bathroom condo now that he wants to go travel.
Without a job anymore, Tom no longer feels morally obligated to pay his mortgage, since the bank did agree to lend him the money based on the colateral value of the property. Besides, California is a non-recourse state, meaning that the bank can't go after Tom's other assets.
Credit Checks Appropriate For ew Hires?
Six months from now, Tom will want to re-enter the workforce. With the relationships he's cultivated and the skills he's developed over the past 8 years, he strongly believes he has a good chance of finding another similar-paying job. His only real worry is whether or not a company will decide not to hire Tom due to his poor credit score if he short-sales his condo.
Tom's current credit score is “somewhere in the 700's“. He doesn't know for sure because he hasn't checked his credit since he bought his house 5.5 years ago. Anything above 720 is considered excellent.
If Tom short-sales, he expects his credit score to drop to the 500's range, which is absolutely horrible. Yet, Tom himself, is a hard working, honest, and nice guy.
Should he be punished for making a bad investment with a bank, given how ferocious the downturn was? Not many people forecasted such a big collapse. Did you? I guess I did in March 2020!
Arguments For Why Credit Checks For New Hires Are Appropriate
1) If you can't handle your finances, you might not be able to handle the job.
2) One datapoint of many that gives insight into one's character.
3) Might demonstrate a level of financial literacy, which is important with finance-related jobs.
4) Could be a signal that demonstrates reliability and responsibility.
5) Gives the employer insight into whether the candidate is desperate or not for money.
Arguments For Why Credit Checks Are Inappropriate
1) It's none of a company's damn business what one's personal finances are, so long as one does a great job for them. Nobody likes an invasion of privacy.
2) Unfairly penalizes people for deciding to buy a home during a time when they simply just needed to buy because of a growing family and a desire to establish roots. Most underwater homeowners are not speculators and millions of people have lost their jobs in the downturn.
3) What if one doesn't get the job and has a very poor credit score? A company could open itself up for a potential lawsuit by the applicant claiming discrimination based on credit score, despite the reason being very hard to prove.
What Is Your Credit Score?
The fact of the matter is, more and more employers are checking potential job applicant's credit scores to determine employability. A credit score is not the main factor, but it is one of many variables which can serve as a tie-breaker among many candidates.
It's important you check your score once a year. I've found a couple errors on my score before which kept my score down by an important 60-80 points! As soon as I cleared the errors, my credit score at the time went up from about 715 to 785.
This jump was huge, because at the time 10 years ago, it was went I bought my first rental property. If I didn't check, I would literally have paid tens of thousands of dollars more in interest over the life of the loan had my erroneous credit score been used.
I found out my average credit score is 798, which is considered “excellent.” However, I'm kind of annoyed why it can't just be 800. Call me greedy I guess!
It doesn't really matter what your credit score is after about 760, because lenders provide the best interest rates for that score and above. But in order to not really matter, you must first check.
Related: How To Improve Your Credit Score To Over 800
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Furthermore, 1 out of 4 credit reports have errors, negatively affecting one's credit score. I had a $8 late electric bill that crushed my credit score by 100 points and almost derailed my mortgage refinance. The scary thing is, I had no idea! A FTC study reported that roughly 25% of credit reports have inaccuracies. Check your credit score today.
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It’s too bad that someone’s financial irresponsibility due to immaturity and lack of financial education as a young person starting out dooms you to be denied decent employment, especially when that employment has no bearing on any financial transactions or data you won’t encounter and want to work in a field that you go to college and work the menial jobs to support yourself and your family but it still isn’t enough so you borrow student loans to live on until you get finished with the degree that you think will take care of all of your financial worries because you’ll get that perfect job that everyone tells you will be available if you just work hard in school and keep your nose to the grindstone to attain the better life. Then after you get that degree your spouse divorces you, splitting the income that didn’t pay all the bills your family has to begin with in half, thereby causing you to go further in debt and unable to pay your bills causing your credit score to go further in the toilet denying you better paying jobs that would pay everything and provide a living for you too like the previous post by the lady that is in forclosure. And the audacity of that person that said because people are poor and denied the good paying jobs because you haven’t had the opportunity to increase your earning ability because you couldn’t pay that credit card bill or other extra luxury because you chose to pay the rent, food, or utilities. how dare a person that is honest and keeps doing as they are told, work and keep on working to hopefully “get ahead” try to improve his employment status. and because he’s barely able to pay the bills that are still there after the income is cut in half, you know he’s stealing everyone blind after work to make ends meet so he can live the life of luxury that we low life financially irresponsible thugs and thieves live, cause everyone knows, like the previous poster says, that broke people don’t have morals and ethics and take what isn’t theirs, because they get turned down based on a number given to you based on the money you try to make to pay the bills you can’t. How dare us thieving low credit scoring workers expect to be judged based on our ability to do the jobs we apply for that have no financial dealings at all. Those computers and networks we take care of for the companies that need them maintained are able to be taken care of by us like they do the financially sound and adept people with perfect credit scores. How dare we let life get in the way of making sure the creditors that charge us higher interest rates for things we can’t afford in the first place don’t get every penny they can get out of us! just another way for those with power and money to keep it away from those of us who don’t and “keep us in our place”! I wanted to puke when I heard some of the previous posts! I mean really? You’re income gets cut in half and your still gonna be able to pay what you were paying and when it’s no fault of your’s when the company shuts its doors and goes overseas where the talent will accept $2 an hour to do what they were paying you that big $8 an hour that still wasn’t enough to keep everything paid in the first place!
I just read that now companies are actually firing employees after buying credit reports from TransUnion. The story I was was about Latoya Horton who worked temp for Bain & Co, and was offered a permanent job after six months. A few weeks after her permanent position started, she was fired after her credit score revealed that her debt to credit ratio was too high. Too much in student loans!! Also, a report said that 85% of the fired employees are black. A new kind of racism!! So you have no money, your family can’t help you go to college, so you take out loans, work hard, and then get fired for having student loans….. So, once, more, the rich get richer…
In my opinion, anyone who is not giving you a loan should not be allowed to check your credit. It’s sort of like if colleges and employers want to check out your facebook page. Some things are just personal.
I agree! And I just heard that not only are employers checking out your Facebook page, some employers and potential employers are actually asking for your FB login and password!!! Some states are trying to ban this, and there may be a federal bill being considered too. What kind of world is this becoming anyway???
OMG, are you serious, I would immediately let them know to lose my file and that I am not interested.
I think credit checks for employment are a good idea. If you have bad credit, you are likely an irresponsible or unmotivated person.
So let’s make sure he NEVER gets a job….. talk about a self-fulfulling prophecy!!!
I do think credit scores can tell you a lot about what kind of person an employee will be. I’m all for it because I have an excellent credit score. Did I buy a house at the top of the market..yes, in fact I did as well, but I paid it off so that it’s not underwater anymore. Would I buy a $1MM house? It’s unlikely that will ever happen, so I don’t have to worry about walking away from such a giant mortgage payment.
I had a credit check ran for my current job because I work in student loans at a large university. We run credit checks for all of our new employees, with the intent of showing whether or not our potential new hires are capable of repaying their student loans. I strongly feel that if you are in the finance industry and are counseling people about how to repay their loans and handle their finances, then you should show evidence of this in your personal financial life. It’s just good business IMO.
We run credit reports on our employees, if you don’t like it you can work elsewhere. Employers use it for a variety of legitimate business purposes.
Taking strategic default on your mortgage to get out might be legal but it’s not something you should be particularly proud of.
It should be noted that while CA is a non-recourse state when it comes to home mortgages – this only applies to new money purchase loans. In other words if your friend Tom or Paul refinanced or took a second and thinks he can default while keeping his $1MM in the bank he will be in for a surprise. Also, the forgiveness of debt is considered taxable income under certain circumstances and the rules are scheduled to change after 2012 unless congress passes new legislation.
Good thing for Tom he never refinanced, and this is a new money purchase loan he’s thinking of defaulting on!
As with most previous commenters, I agree that individuals seeking employment in the finance/banking industries should have a credit check. This could include other job opportunities that require money handling skills such as cashiers. So, does that mean that 16 year olds looking for work at McDonald’s have to have a credit check too? I wonder if in fact McDonald’s and or Burger King do require credit checks?
I would not hire a person who voluntarily defaults on his obligations in order to take a holiday. I have no interest in hiring people whose ethics and morals fall short of basic standards.
This is always an interesting one. When I last wrote about this, people’s credit wasn’t quite as bad as it is now with the millions out of work and people walking away from their mortgage. Personally, I don’t like government telling companies what they “can’t” do. I do question the value of checking credit scores for probably most jobs. But in some jobs, I’d want the credit check. If companies end up missing out on good employees or waste money on credit checks then it’s their loss. But I don’t think we need one more law dictating how companies hire.
I strongly disagree with the policy that lets you walk away from a mortgage. America is the only country (that I’m aware of) that allows this. It is such an irresponsible policy that certainly contributed to the meltdown. It isn’t the individuals fault, but the policy makers and I hope it is corrected in the near future.
But pulling the score tells something, even if it is just a little bit. The more info to analyze a potential colleague you could spend 50 hours a week is good no?
If you have 100 qualified candidates, is it not a legitimate way to help screen?
I don’t see why Tom doesn’t even try to sell the house…is it so underwater that it would not even allow him to take a loss of his down payment and move on? If it is, then I would consider renting the place out. Personally, I wouldn’t want to walk away, not just because of the credit score but also I think it would have a lot of other consequences down the road that Tom’s not really worried about right now.
My job is not in the financial industry although we deal with plenty of payments and sensitive financial matters and my job did have a credit check. But clearly there was no standard of absolutely no debt because I had both credit card debt and an auto loan and still got the job. However, I didn’t have any negative marks on my report like late payments or bankruptcy so maybe that was what they were looking for. In any case, I don’t believe they actually show employers a score, they only only see what is on your report.
I fully believe that people applying for jobs in the finance industry should be subject to credit checks. Other than that, though, I don’t see why it should be a factor.
Who decides what credit scores are acceptable? Do you hire the guy with a good score and a high debt-to-income ratio, or the one with a pathetic score but no debt? If he’s applying for a job as a truck driver, does it really even matter?
If we allow that to happen, what’s next? Do we require employees to have a Dave Ramsey emergency fund before they can be hired? A certain amount of money in the bank? Should employees present their receipts every Monday so their supervisors can see what they bought over the weekend? To me, if we universally accept credit checks for jobs that shouldn’t require them, we risk escalating those requirements until all but the fiscally perfect are unemployed and homeless.
It is quite interesting is it? Your last line in your comment really hits home. IF this happens, there becomes a DEATH SPIRAL to those without perfect credit scores.
Alas, nothing is so simple, and a lot of other attributes go into the process making of hiring.
There already is a death spiral- as far as I am concerned. My first job was as a temp for a subprime mortgage company (no credit check required). I was made permanent and hired as a Receptionist at $14.00/hr. I was 22 yrs old. I began to read the companies training materials and I was quickly promoted to Loan Set Up- responsible for pulling credit for loan applications. Still, no credit check required. My pay was increased to 17.00/hr. Eventually, I had moved up in the company until I was making 5-8k a month. I never had a credit check and I never committed a crime against anyone or my company. I kept my brokers honest and I worked hard to fund good loans. I took mortgage documents home and I had access to borowers social security numbers. All this at 25 yrs old. One day, my company laid me off a couple months prior to closing their doors. I no longer had a company account with Shred-It, yet I made sure to shred and destroy all personal information. I owned a 500k home with more than 65% equity on it. I never found another job making decent money to pay on my 175k loan. My home had been on the market for over a year and it did not sell.
When I tried to get a new job, in MY industry at 27 yrs old, I passed three interviews and they told me that they needed to pull background. On my fourth interview they called me in to ask me why my house was starting foreclosure. I explained, and they informed me that they couldn’t hire me for the job. That job would have saved my home and all the possessions I began to lose within that year. That was in 08. To this day, I have had many job offers- even as temp assignments- that have been rescinded due to my foreclosure in 08. Companies have hired neighbors of mine who have evictions and repossession but they draw the line at a foreclosure. A foreclosure can’t be paid off. Once it happens, it’s there. How long should one be punished before they are allowed to return to a middle class life?
My mother fell in the trap of the illusive cc and I learned early on from here mistakes. I am proud to say I have never paid a finance charge in my life. My house on the other hand is a different pain in the ass.
I work in he finance industry and I want to credit check everyone who works for us. I even run a credit check on our office assistant. We deal with a lot of money, so yes, I want to see how you handle your finances and if you are going to be okay when you find yourself dealing with millions of dollars. Because of that we had to deny employment to a nice and smart and capable guy. We could not trust him. However, if we are hiring a janitor who would never have access to our financial transactions and money, then I don’t really care.
Trust is a big thing indeed! Too many horror stores of financial deceit.
Should it be allowed? Yes, why not? An employment contract is a voluntary relationship, and either side has the right to refuse to enter the relationship.
Should it be required? No, why? It should be up to the business owner or hiring manager to decide if it makes sense or not.
Makes sense Kevin. I agree with your answer.
I’m a bit confused. What am I missing?
“Yet, Tom himself, is a hard working, honest, and nice guy. Should he be punished for making a bad investment with a bank?”
If Tom walks from his mortgage, don’t you all eventually pay for that in some indirect way? He may have made a bad investment. As an educated guy, I’m not sure if that was the bank’s fault.
I could be wrong, of course, but if everyone with the capacity to pay for a mortgage did this and then went on a six month holiday, would that be cool?
I don’t see how this is honest, although I’m sure he’s a good guy.
It is a dilemma, isn’t it? If the bank didn’t feel they could make money off Tom, they wouldn’t have lent him money in the first place.
Yes, this is exactly why the housing market imploded.. b/c people didn’t honor their debts, but also b/c banks lent excessively. Who is to blame? Everyone.
Not me… :)
Sam – some forward thinking employers will accept a copy of your credit report which you yourself generate. As a soft inquiry, this report will not lower your score, which cannot be said for a prospective employer’s hard inquiry. It’s always worth offering this as an alternative to agreeing to a hard inquiry.
But you can’t fight city hall – standing up for your privacy rights is noble, but won’t change the world. If they want your credit report, they are not going to change their policy for you or anyone else.
Regardless of which approach he takes, Tom should proactively advise this type of future employer that they can expect to see the ‘damage’ on his otherwise impeccable report – and he can simply explain what it means and why it happened.
Having been a hiring executive for many years in my past, I would be ok with this, and would not automatically throw Tom’s application in the trash.
The thing to remember is unlike instant credit decisions made by a computer software when you apply for a loan, an employer will actually look at the report and be willing to look ‘under the hood’ of his report – rather than give up on Tom simply because his score is now in the 500’s.
Ross, insightful, and thanks for your thoughts. One needs to pitch their story and explain without being defensive, what happened. I believe employers might be MORE inclined to hire someone who is open and honest, and who has gone through hardships than not.
Let me first start out by stating that i am also an idiot, by the definition of one of your readers. My credit score is in the 700’s somewhere, although I have not checked it in a few years. To me, the idea of a potential employer checking your credit score is very invasive and disturbing. This means that if someone makes one mistake, or has some bad luck in this housing and employment market, they are going to take a hit that will be extremely difficult to overcome. Bad credit score -> can’t get job -> worse credit score, and your life snowballs downwards out of control.
Also, from the employer’s standpoint, if they rely on numbers like this rather than on what is truly relevant to the job, combined with their own instincts, they may be bypassing the better candidate, depending on what the position is. I agree that if the job position relates to managing finances, it could be relevant. It the job is something in the creative field, it would not be relevant at all.
What if there are 100 candidates, all who look similar on paper? Would it not be telling if one had a 520 credit score vs. one with a 750?
If all these guys are similar on paper, why not just be really lazy and just interview the 3 guys with the highest credit score? Or maybe hold a race and just interview the 3 guys who can run the fastest mile?
In many, if not most jobs, your financial skills are totally irrelevant. Many very creative people have little financial sense, but could still be the best candidate for a job requiring their type of creativity. By screening out the guy with the 520 because you don’t want to bother interviewing him, you may be eliminating the very best guy for the job.
There is no proof that shows that people with weaker credit are worse employees than people with good credit, or that they are more likely to steal or commit fraud. Bernie Madoff probably had a better score than you do. Besides, you don’t know what caused a person’s poor credit score – layoff, serious illness in the family, etc. Why do you assume a higher credit score is an indication of a better character? You seriously could argue that a person with a weak credit does need the money more and would be more likely to work hard to do well and keep his job.
Tom wants to travel anyway and there is no guarantee that when he returns he will find a job close by his current condo. Why not rent that sucker out and let someone else pay the mortgage while the asset appreciates in value. In the meantime Tom can find a less expensive place to rent himself once he knows where he will be employed. If he later decides he doesn’t want to deal with the underwater condo (assuming it is still underwater) he can get rid of the tenant and the condo at that time. He will already be employed so no big deal if his credit score drops.
Rent might not cover all costs, given there is property tax as well. To be free is a wonderful thing.
You’re preaching to the choir about freedom Sam :)
To me…this is yet another example of our current financial structure forcing us hostage to this mythical “credit” status. Honestly, my goal is to get into a position where I don’t ever need credit again. I know it’s hard to get arms around but think about this…credit is only really needed if one does not have capitial and wants to borrow. If you can accumulate enough capital so that you don’t need to borrow, then you don’t really care what you score is. That’s my goal.
Hi BE, I agree with this completely. Some have it good where they have cash, already own their home outright, or have a mortgage, and already have a good credit card. But, they still want to have the option of working if they want. That would be bad to be denied due to bad credit.
When you’re getting a loan, the financial institutions usually ask for a job letter, recent pay slip, and any obligations that you might have. They also check your credit using a local agency. But I’ve never thought about finding out my score. It would seem strange for an employer to ask for a credit score…
Gotta find it out Dannielle! Knowledge is power!
BTW, I tried commenting on a couple of your posts, and each time I click the post it says “404 error”. Might wanna check!
thx
I think it’d be appropriate in a job that involves finances – paying invoices, receiving payments, managing money. In that case your personal finance history is RELEVANT to the job (i.e. it’d reveal your financial strengths and weaknesses). If the job isn’t related to finances at all, and your financial habits/skills are irrelevant… then that’s a different story.
When would your financial habits/skill be irrelevant?
In my opinion the answer is never.
This is a good point.
I am in favor of a credit check. Sometimes bad marks on a credit report can be explained but it is also a great indicator of proper decision making skills. Of course, I don’t think people with higher credit scores are better workers, but potential problems could vetted if this was standard practice.