News & Resources

Credit report checks prove more widespread than consumers realize

Oct 26, 2013 Walt Wojciechowski

It's no secret that lenders check consumer credit reports before providing loans to borrowers, and employers often pull credit scores before making their top candidate a job offer. However, many consumers are unaware of the broad range of organizations that use this practice and the scenarios in which they implement it.

In fact, it might come as a surprise to many that solid credit is often a prerequisite for their dream jobs. A recent study by the Callcredit Information Group showed that 77 percent of consumers were not aware that firms could check their credit scores when considering them for employment. The report noted that certain fields value the results of the check more highly.

The practice of pre-employment credit screening is not universal among firms, but it is prevalent enough to merit awareness. While not even one in five companies check the credit of every interviewed candidate, 40 percent of firms used a credit background check for some employees, according to a poll by the Society for Human Resource Management.

It should be no mystery why employers are interested in applicants' personal credit histories: ABC News noted that it's often an indicator of a person's potential productivity.

"Many believe that someone drowning in debt will be more focused on his or her personal financial issues than work, or that a long history of unpaid bills, foreclosures and delinquencies could be indicative of a lack of responsibility and good decision making skills that could ultimately hamper job performance," the news source wrote.

ABC News noted that while the practice of checking potential new hires' consumer credit data may come as a surprise to some, companies do often have to obtain written approval from the candidate before running a credit check as a condition of employment. Furthermore, 80 percent of firms have hired individuals despite unfavorable credit information, the news source pointed out.

Many consumers lack big-picture credit literacy
However, unawareness of when and how credit checks are executed is even broader than that. The Callcredit study showed that over half of consumers did not know gas, electric and other utility companies check their credit before the start of service, while 45 percent had no idea that mobile phone and cellular service providers often use the same practice. In fact, a startlingly high 86 percent of respondents believed that banks were the only entities that regularly check their credit reports.

Some consumers' excuses for poor credit histories reflect a deeper unawareness of how important the criterion is in many sectors. Granted, there is some humor in many of these explanations: According to the Los Angeles Times, one man claimed that his finances had fallen apart because the restaurant he had opened with his daughter had failed - and went on to mention that his daughter was nine years old.

Lenders might consider offering their services as an excellent resource for consumer education, as despite the laughs afforded by anecdotes like this one, damage to a credit report can have a longer-lasting effect than many consumers realize. Nerd Wallet pointed out that a range of negative criteria - including bills in debt collection, student loan defaults and chapter 13 bankruptcies - can remain on one's credit report for up to seven years, while chapter seven bankruptcy's effects can be felt for up to 10 years.

Given the surprisingly widespread confusion about credit check practices, firms might consider being fully transparent regarding when and how they monitor the reports by providing both customers and prospective employees with as much detailed information as possible regarding their policies.