When a credit report can hurt your chances of being hired

By Jeanne Sahadi, CNN

(CNN) — A background check can sink a job offer if prospective employers don’t like what they see. While they can request to have a lot of information about a job candidate’s past included in such a report, increasingly they are no longer allowed to request people’s credit history.

New York just became the 11th state to prohibit employers from using individuals’ credit reports when making employment decisions (eg, hiring and promotion), except for certain types of jobs.

The new law goes into effect on April 18.

The other states with similar (although not identical) laws on the books are: California, Colorado, Connecticut, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont and Washington. In addition, similar laws exist at the local level in five cities (New York City; the District of Columbia; Chicago; Madison, Wisconsin; and Philadelphia) plus Cook County, Illinois.

Unlike the laws in the other states, the reach of the New York State statute may apply across the country. “As a practical matter, this means an individual who lives in New York but applies for a position in another state whose credit history is obtained for employment purposes may be covered by the New York credit history discrimination law,” attorney Stephen Fuchs, a shareholder at employer-side law firm Littler Mendelson, wrote in a blog post.

As more states restrict the use of credit histories in job decisions, employers pulling them may be going down, even in places that don’t prohibit the practice.

National employers … tend to want to do the same thing nationwide. And as the number of jurisdictions with restrictions has grown, I have seen employers say, ‘Do we really need to check credit history and why?’ and they do away with it,” Fuchs told CNN.

Still, credit reports are used in many cases

That said, even in states that restrict credit report use, employers are still permitted to pull reports for any role that the state statute identifies as an exception.

Those roles typically include law enforcement jobs, roles that would give a person access to intelligence or national security information, and jobs with control of company funds or access to trade secrets, Fuchs said.

In securities and financial institutions, pulling a person’s credit report is permitted for certain types of jobs such as those subject to financial regulatory oversight, he noted.

“There’s a concern that people with debt and bad credit may be more inclined to engage in theft, embezzlement and fraud. That is generally the rationale,” Fuchs said.

Elements that may raise eyebrows

There is no list of red flags on a credit report for which every employer would kill a job offer. And it’s worth remembering a credit report is only one of many factors in a holistic background check.

But, generally speaking, “organizations are looking for volume and recency of potentially negative information,” said Melissa Sorenson, executive director of the Professional Background Screening Association.

That negative information includes long overdue debt.

“Employers … may be concerned by accounts that are seriously delinquent, sent to collections, or written off, because such items can signal financial distress or poor debt management, particularly for roles involving fiduciary responsibility, access to funds, or sensitive financial data,” said Rima Hopkins, an HR knowledge adviser at SHRM, the leading association for human resource professionals, in a written reply to CNN.

Hopkins noted, however, that “employers must follow strict procedural safeguards and give candidates the opportunity to review and respond before a hiring decision is affected. As a result, while past-due and collection debt may raise concerns in job-relevant contexts, employers are expected to connect those concerns to legitimate business necessity and to avoid using credit information in a way that is overly broad or discriminatory.”

Also, she added, organizations may give “little or no weight” to medical debts or student loans, especially if those debts are not related to the nature of the job opening.

What you can do to prevent issues

Employers are not allowed to do a background check on you – and may not pull your credit history as part of it – without your written consent. They usually don’t do a background check until you’ve been offered the job.

So, during your job search, check your credit report from each of the three credit bureaus to make sure there are no inaccuracies. (You can obtain those reports for free from annualcreditreport.com.)

If you have a legitimate credit issue on your report and you do get a job offer, Sorenson recommends being transparent about it. “If you have some [negative] history, talk to the prospective employer and explain the circumstance.”

The federal Fair Credit Reporting Act gives you certain rights with respect to job background checks. For instance, employers may not finalize a decision not to hire you because of something in the background check until they’ve given you a copy of the report, which gives you the opportunity to contest errors or incomplete information with the background screening company.

But always check the fair credit reporting rules in your state, which may offer you additional protections. Some states, for instance, let you request a copy of the background report that the prospective employer orders when you sign the consent form.

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