A bad credit rating can hurt

The use of credit checks to screen job candidates has come under fire. The U.S. House of Representatives and at least 20 states are considering legislation that would prohibit the use of a job applicant’s credit history for the purpose of hiring or firing, according to the National Conference of State Legislatures. However, 60 percent of employers pull credit reports for some or all of prospective hires, according to a survey. And, candidates being considered for certain types of positions likely will face credit checks in any event, as lawmakers aren’t proposing to ban the practice altogether.

Credit checks are most often conducted for executive positions, government jobs requiring security clearance and jobs where workers handle or manage money or have access to personal information.

The rationale is that people who mismanage their own finances can’t be expected to responsibly manage an organization’s, and if their situation is dire, they might be tempted to steal or misuse personal information for their own gain, says Jeff Wizceb, vice president for the background screening company HR Plus.

Most employers who check credit reports do so selectively. Of the 60 percent of employers who pull credit reports, 47 percent said they did so only for certain positions, according to the survey by the Society of Human Resource Management.

Still, that means 13 percent do so for every applicant, so job seekers with good or defensible credit may have a competitive advantage.

By law, an applicant must grant permission for a company to obtain his or her credit history. “However, smart job hunters will get copies of their credit report beforehand in the event there are errors or areas they can improve,” said financial planner Joel Ohman, founder of CreditCardChaser.com, a credit card comparison site. “Even if there is nothing that can be corrected quickly, at the very least the job candidate will be able to identify potential problem areas and have answers prepared.”

People are legally entitled to review their credit histories for free each year through annualcreditreport.com. The first order of business is to correct inaccuracies. Under the Fair Credit Reporting Act, credit bureaus must investigate disputed items and remove them from the credit report if they cannot be verified. If a consumer disagrees with the results, he or she can ask the bureaus to add a statement of dispute to the report.

At the same time, borrowers should pay off any overdue bills or old debts they forgot about, and pay down high credit card balances to improve their credit utilization ratio (how much of their available credit line they owe.) Credit card balances in excess of 50 percent of their limits will raise eyebrows, while 30 percent or lower is seen as responsible, says Gail Cunningham, vice president of public relations for the National Foundation for Credit Counseling.

Beyond those measures, only time and discipline can mend damaged credit. “Don’t fall for credit doctoring or credit repair services. Start treating your debt obligations responsibly, and over time, your credit report will improve,” Cunningham said.

The credit information most likely to affect an employer’s decision not to make a job offer includes outstanding judgments, which are court decisions regarding debts, and accounts passed on to collection agencies. Next is bankruptcy, followed by a high debt-to-income ratio. A foreclosure did not rank especially high among employers’ concerns.

“What employers are on the lookout for is a pattern of what could be construed as poor judgment, especially when no efforts have been made to remedy problems,” said employment attorney Pamela Devata. Most employers give candidates an opportunity to explain any smudges, she says. Certainly, unemployment can lead to maxed-out credit cards, foreclosure and other financial setbacks, making it all the more critical to land a job. “If that’s the case,” Cunningham said, “you can say, ‘Prior to losing my job through no fault of my own, I had good credit.’”