Pre Employment Credit Check Defaults: Understanding Employer Concerns

Pre employment credit check defaults can be a significant concern for job seekers navigating the hiring process, potentially raising questions about how past financial missteps might influence employment opportunities. Understanding what constitutes a default on a credit report and how employers interpret this information is crucial for preparing for background checks. This resource aims to shed light on the implications of credit defaults in pre-employment screenings, explore the legal boundaries surrounding their use in hiring decisions, and offer guidance on how candidates can address and mitigate potential concerns related to their credit history.

What is a Pre-Employment Credit Check

A pre-employment credit check is a review of an individual's credit history by a prospective employer. Employers use these checks to gain insight into a candidate's past financial behavior and responsibility. This is particularly common for roles that involve handling money, managing finances, or accessing sensitive information. The primary goal for employers is often to assess trustworthiness and reduce organizational risk, such as potential theft or fraud.  

What Information Appears in a Pre-Employment Credit Report Regarding Defaults

A pre-employment credit report is a modified version of a consumer credit report and typically does not include your actual credit score. Instead, it highlights specific aspects of your credit history relevant to employment screening.  

Information Typically Included:

• Identifying Information: Name, address, and sometimes previous employers.  
• Credit Accounts: Details about credit cards, mortgages, car payments, student loans, and other loan types.  
• Payment History: Indicates if payments were made on time or were late.  
• Debt Levels: The amount of debt owed on various accounts and available credit.  
• Public Records: Information such as bankruptcies, tax liens, and civil judgments.  
• Collection Accounts: Accounts sent to a collection agency due to non-payment.  
• Defaults: A default occurs when a lender closes an account due to missed payments, usually after three to six months of non-payment. This notation can remain on the report for six years from the default date.  

Employers primarily look for patterns of financial distress or irresponsibility. For instance, a history of multiple late payments or excessive debt might be viewed as red flags.

How Do Employers View Defaults

The significance an employer attaches to a default on a credit report can vary considerably. This often depends on the job's nature and the context of the financial issues.

Job-Relatedness of Credit History

The relevance of credit history, including defaults, is often directly tied to the specific responsibilities of the job.  

• High-Risk Positions: For roles involving significant financial responsibility, access to cash, sensitive data, or company assets (e.g., accounting, finance, executive positions), employers are more likely to scrutinize defaults closely. A poor credit history in these cases might be seen as an indicator of potential risk.  
• Other Positions: For many other roles where financial management is not a core duty, a default may carry less weight or be irrelevant. Several state and city laws restrict credit checks to only these relevant positions.

Type and Context of Defaults

Employers may also consider the specifics surrounding the defaults:

• Pattern vs. Isolated Incident: A history of multiple defaults across various accounts might be viewed more negatively than an isolated default caused by a specific hardship, such as a job loss or medical emergency.  
• Type of Debt: Defaults on certain types of debt, like medical bills, might be viewed with more understanding, especially as medical debt is often involuntary and widespread. However, the pre-employment credit report may not specify the reason for the default. Defaults on credit cards or other loans due to perceived financial mismanagement might raise more concerns for finance-related roles.  
• Age of Default: Older defaults generally have less impact than recent ones, particularly if more recent credit history demonstrates responsible financial behavior.  

Employers are generally looking for indications of responsibility, trustworthiness, and any potential risk to the company.  

Legal Protections for Job Applicants

Several laws regulate how employers can use credit information during the hiring process, offering important protections to job applicants.

Fair Credit Reporting Act (FCRA)

The FCRA is a federal law setting national standards for employment screening, including credit checks. Key FCRA provisions ensure fairness and transparency.

FCRA Requirements for Employers:

• Permissible Purpose: Employers must have a legitimate, job-related reason to request a credit report.  
• Disclosure and Consent: Applicants must be informed in writing that a credit check may be conducted, and employers must obtain the applicant's written permission beforehand.  
• Pre-Adverse Action Notice: If an employer considers not hiring an applicant based on credit report information, they must provide the applicant with a pre-adverse action notice. This includes a copy of the credit report and a summary of FCRA rights.  
• Opportunity to Respond: Applicants must be given a reasonable time (typically five business days) to review the report and dispute inaccuracies or explain negative information.  
• Adverse Action Notice: If the employer proceeds with not hiring, they must provide a final adverse action notice, including credit reporting agency details and the applicant's right to dispute.  

The FCRA generally limits the reporting of most adverse information, including defaults, to seven years. Bankruptcies can be reported for up to 10 years.

State and Local Laws

Many states and cities have enacted laws stricter than the FCRA, further limiting employer use of credit information.  

• Jurisdictions with Restrictions: California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont, Washington, New York City, and Chicago are examples of places with such laws.  
• California Example: Generally prohibits employers from using credit reports for employment decisions except for specific positions (e.g., managerial roles, law enforcement, positions with access to significant funds or sensitive data).  
• New York City Example: Has one of the strongest laws, broadly prohibiting employers from requesting or using consumer credit history for most employment decisions, with limited exemptions.  

These laws often restrict credit checks to positions where financial history is directly relevant to job duties.

Equal Employment Opportunity Commission (EEOC)

The EEOC enforces federal laws against employment discrimination. While employers can ask about financial information, they must not:  

• Apply financial requirements differently based on protected characteristics (race, color, religion, sex, national origin, disability, age).  
• Use financial requirements that disproportionately disadvantage protected groups unless the requirement is job-related and consistent with business necessity.  

Applicants who believe an employer used credit information discriminatorily can file a complaint with the EEOC.

How Defaults Can Impact Hiring Decisions

A default on your credit report can potentially influence a hiring decision. This is particularly true if the role involves financial responsibility, handling cash, or access to sensitive company information. Employers might perceive a pattern of financial irresponsibility as a potential risk in the workplace. The absence of strong mitigating circumstances or a clear explanation for the defaults can also be a factor.  

However, many employers consider the overall context. An isolated incident, an older default, or a candidate who provides a reasonable explanation and demonstrates current financial stability may not be disqualified solely based on a past default.  

Explaining Defaults to a Potential Employer

If you are aware of defaults on your credit report and anticipate a pre-employment credit check, a proactive approach can be beneficial.

• Be Honest and Prepared: If an employer informs you they will run a credit check (after obtaining your consent), you may have an opportunity to briefly address any significant negative information.  
• Focus on Context and Resolution: Clearly explain the circumstances that led to the default (e.g., unexpected job loss, medical emergency). More importantly, detail the steps you have taken or are currently taking to resolve the issue and manage your finances responsibly.  
• Keep it Concise: Provide a brief, factual explanation without making excuses. The aim is to demonstrate awareness, responsibility, and that you have learned from the situation.  
• Highlight Strengths: Reiterate your qualifications for the job and how your skills and experience make you a strong candidate for the role.  

It's advisable to only discuss your credit if the employer initiates the conversation or if you are certain a credit check will be performed for a relevant position. For jobs without financial responsibilities, a credit check might not be conducted or may not be a significant factor.  

Disputing Errors on Your Credit Report

If you find a default or other negative information on your credit report that you believe is inaccurate, you have the right to dispute it.

1. Obtain Your Credit Reports: Request free copies of your credit reports from Equifax, Experian, and TransUnion via AnnualCreditReport.com.  
2. Identify Errors: Carefully review each report for inaccuracies, such as defaults for accounts you don't recognize, incorrect payment statuses, or outdated information.  
3. Gather Supporting Documents: Collect any documents that support your claim, like payment records, correspondence with lenders, or court documents.  
4. File a Dispute with Credit Bureaus: Contact each credit bureau reporting the error. Disputes can usually be filed online, by mail, or by phone. Clearly explain the error and provide copies of supporting documents.  
5. Inform the Information Furnisher: You can also dispute the inaccurate information directly with the company that provided it to the credit bureau (e.g., the bank or collection agency).  

Credit bureaus generally have 30 days to investigate disputes and must correct or remove inaccurate or unverified information. If an error on a background check results in a lost job opportunity, you may have legal recourse under the FCRA.  

Strategies for Improving Credit with Defaults on Record

Even with defaults, you can take steps to improve your creditworthiness over time. This demonstrates financial responsibility to potential employers.

• Pay All Bills On Time: Consistent, on-time payments for all current obligations are crucial for rebuilding credit.  
• Address Outstanding Defaults: If possible, work to pay off or settle defaulted accounts. A "paid" or "settled" status is generally viewed more favorably.  
• Reduce Credit Utilization: Keep balances low on existing credit cards, ideally below 30% of your credit limit.  
• Consider a Secured Credit Card or Credit Builder Loan: These products are designed to help individuals build or rebuild credit when used responsibly.  
• Avoid Unnecessary New Credit: Limit applications for new credit, as each can result in a hard inquiry.  
• Check Credit Reports Regularly: Continue to monitor your credit reports for accuracy and to track your progress.  

Rebuilding credit after defaults requires time and consistent effort. Significant positive changes often take 6-8 months or longer to become apparent.

Conclusion

Defaults appearing on a pre-employment credit check can be a concern for job applicants, especially for roles with financial responsibilities. However, understanding the information employers see, knowing your rights under laws like the FCRA and relevant state regulations, and proactively addressing any issues can help lessen potential negative impacts. Key strategies include maintaining a positive recent credit history, being prepared to explain past financial difficulties if necessary, and ensuring the accuracy of your credit report.

Frequently Asked Questions