Can Bad Credit Ruin Your Job Search?

Have you ever applied for a job and wondered if your bad credit would affect the outcome? Pre-employment credit checks aren't that uncommon these days. 

According to a survey released by the Society for Human Resource Management in 2010, 13 percent of the companies surveyed check the credit reports of all candidates and 47 percent check some candidates.


Should you be worried if you have a poor credit history?

Employment-related credit checks are legal in most states, but there are limits to what employers can see and how they can use your credit information. Here's what you need to know about credit reports and your job search.


Contrary to popular belief, employers can only see your credit report not your credit score. Credit reporting agencies do not provide your credit score to employers as part of the pre-employment screening process. "Credit scores are sold along with credit reports, but they are not the same thing," says John Ulzheimer, the president of consumer education at SmartCredit.com. 

Your credit report offers an overview of how much debt you have and whether you pay it on time, while your score is a number that represents your credit risk, usually between 300 and 850, based on this information. Under the Fair and Accurate Credit Transactions Act, all Americans are entitled to a free credit report, but not a free credit score, from each of the three major credit reporting agencies once every 12 months.


According to Mike Aitken, director of government affairs for SHRM, employers look at long-term trends, not whether you missed a loan payment or forgot to pay your Visa bill a few times. "They're looking to see if the person can handle their personal finances," he says. "In particular, they care about when things go into default or judgment." As Ulzheimer says, things get messy when collectors start calling the office or trying to garnish wages, so employers want to avoid those situations.


Before an employer can view your credit report, they need your permission in writing. That's a requirement under the Fair Credit Reporting Act. Once you grant permission, Ulzheimer says employers generally buy that information, along with a criminal background check and other information, from third-party screening companies. Aitken say it can cost employers upward of $200 to run background checks on each applicant, so they'll usually wait until they're almost ready to make a job offer. And unlike other credit inquiries, employment inquiries do not impact your credit score.


You could deny a prospective employer permission to view your credit report, but the company might not hire you without this information. Under the Fair Credit Reporting Act, before the employer makes an adverse decision based on your credit report, such as denying your job application, the employer must tell you and provide a copy of the credit report. They are not required to give you the opportunity to explain your bad credit, but SHRM's study found that 65 percent of employers say they give candidates the opportunity to explain the contents of their credit report before making a hiring decision. If you have serious credit issues, Gail Cunningham, vice president of public relations for the National Foundation for Credit Counseling in Washington, D.C., suggests being upfront about it. "I would be truthful and say succinctly what happened that caused your financial hiccup and how you intend to pull out of it," she says, adding that consumers can contact credit bureaus and electronically submit a 100-word explanation to accompany their credit reports.


Some states have or are getting stricter on pre-employment credit checks. An Illinois law took effect in January that outlaws employment-related credit checks except in a few very specific instances. Hawaii, Oregon and Washington already have laws limiting this practice. And 25 states have bills pending in the 2011 legislative session, according to the National Conference of State Legislatures. "In these economic times, with millions of people having a foreclosure or bankruptcy on their record, employers are going to have to rethink the relevance of a credit report with respect to a job applicant," says Cunningham.


Aikten knows of a few cases where a company chose not to make a job offer based on the findings of a credit check. In one case, a company discovered that a prospective CFO had tens of thousands dollars in gambling debt, so they felt a fiduciary responsibility to find someone else. But he stresses that credit reports are rarely the deciding factor. "Just because somebody has a bad credit report doesn't mean they'll embezzle or steal," says Aitken, "but it is a factor along with work experience, certification requirements and character references. It's one piece of the pie."


If you think you're home free once you land a job, think again.

"Ask anybody in the military who's lost their clearance," says Ulzheimer. "It's not terribly common, but you can lose your security clearance if you start to have collections issues." According to the 2010 SHRM survey, almost 20 percent of employers conduct ongoing credit and/or criminal background checks post-hire on employees working certain jobs, such as those with access to confidential information, and 5 percent do them for all employees. Some firms perform credit checks before granting a promotion or a change in status and some do so annually.

All the more reason to continually monitor your credit report and work to clear up any issues, as corrections won't happen overnight. Just as you shouldn't wait until you're applying for a car loan or a mortgage to think about your credit report, you shouldn't wait until you're asked to share your credit report with potential employers.

"People say 'I don't care what my credit report looks like, because I'm not applying for a loan,' but what if you lose your job tomorrow?" asks Ulzheimer. "You always have to be worried (about) what's on your credit report."


John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.

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A Credit Score That Tracks You More Closely Than You Think ...

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A Credit Score That Tracks You More Closely

By: Tara Siegel Bernard
Anyone who has recently applied for a mortgage knows that lenders are already looking much more closely at your financial affairs. But soon, they’ll be able to easily delve into the deepest recesses of your financial life, accessing information that never before appeared on your credit report.


This week, a company called CoreLogic introduced a new type of credit file, which is based on the giant repository of consumer data it maintains on just about everything that most of the traditional credit bureaus do not: missed rental payments that have gone into collection, any evictions or child support judgments, as well as any applications for payday loans, along with your repayment history.
The new report also includes any property tax liens and whether you’ve fallen behind on your homeowner’s association dues. It may reflect that you now owe more than your house is worth or if you own any other real estate properties outright. It also is supposed to catch mortgages made by smaller lenders that the big credit bureaus may have missed.
 
The idea, CoreLogic says, is to provide lenders with more details about prospective borrowers, supplementing what they already know through the more traditional credit reports furnished by the big three credit bureaus, Equifax, Experian and TransUnion. Moreover, CoreLogic has formed a partnership with FICO — the provider of one of the most popular credit scores used by lenders — which will formulate a new consumer score based on the new data.

Perhaps it’s not surprising that a company decided to pull together this information, since much of it is already publicly available. But because it comes on top of all the other information that’s being collected about you — your exact location at every minute, where you’ve been on the Web — you can’t help but feel that some of these companies know more about your activities than your spouse.
While the CoreScore credit report became available to all types of lenders on Wednesday, the actual score, which will be ready in March, is being created specifically for mortgage and home equity lenders, though it could eventually be developed for other types of credit.

For many consumers, the files are likely to reveal black marks that previously went undetected, which may damage an otherwise clean record. But the companies contend that it works both ways: The added information could help consumers with thin credit files by illustrating positive behaviors elsewhere, say making timely rent payments.

So why now? Clearly, the two companies saw a business opportunity. Lenders, who just a few years back looked the other way, remain particularly skittish about mortgage lending and are looking for more information about prospective borrowers’ ability to pay their debts.

“Lending is very constrained and origination volumes need to grow to make for a profitable mortgage business,” said Joanne Gaskin, director of product management global scoring at FICO. “So lenders are looking for ways to expand, but to expand safely.”

An estimated 100 million American consumers will have a CoreScore credit report, while more than 200 million people have traditional reports from the big three bureaus. Though the new information can influence a lender’s decision, the new score isn’t replacing the classic scores used in the automated mortgage underwriting systems kept by Fannie Mae, Freddie Mac or the Federal Housing Administration, which buy or back the vast majority of mortgages (though CoreLogic said it has let the agencies know what it is doing). But the added information may sway a lender to charge you more (or less) in interest on a mortgage. Lenders of all stripes, including auto lenders, have access to the reports, and they will be marketed to employers and insurers, too.

Ms. Gaskin said that FICO was still tweaking the credit score’s formula. But the next step is to build something that will try to get even deeper inside your financial mind: The company plans to create a more sophisticated tool that will predict how you might behave under different loan terms.

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Navigating the Three Credit Score System

From: Mint.com

Each of us has three credit reports housed by the three major credit reporting agencies; Experian, Equifax and TransUnion. And, for most of us those three credit files are scoreable.

Most lenders will make decisions using just one of our credit bureau risk scores.

That means when you apply for a credit card or an auto loan, the lender is going to buy one of your three credit reports and one of your three FICO scores (or, less frequently, one of your three VantageScores) to make their lending decision.

The only exception to the “one report for one loan” rule is in the mortgage environment. the mortgage lender will almost always pull all three of your credit reports, all three of your FICO scores, and then base their decision on your middle score.

How Widely Your Scores Can Range

Each of your credit scores is going to be different, primarily because the information in our credit files is never 100 percent identical.

Additionally, because of the common lending practice of only pulling one credit score, it’s almost a guarantee that lenders are going to see different numbers for us depending one which of our three credit reports they happen to purchase.

For example, my FICO scores vary by 24 points from my highest score to my lowest.

My highest score is based on my Equifax data and my lowest is based on my TransUnion data. This means if I applied for any loan outside of a mortgage and the lender pulled my TransUnion credit report they’d see my lowest FICO score. If that “lowest” score fell below the lender’s risk threshold, I could be denied the loan or approved but with less advantageous terms.

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8 Secret Scores That Lenders Keep Part 1

By Liz Pulliam Weston from MSN Money


Lenders track every last detail of your spending habits, and then use the data to estimate not just how big a risk you are but how profitable a customer you might be.


Recently my husband and I received nearly identical balance-transfer offers from our respective Bank of America cards. The offers were identical, that is, except for the rates we'd be given. He was enticed with a 0% rate. Mine was 2.99%.


We live at the same address and share the same income. We both have high credit scores (although his are, annoyingly, a few points higher than mine).


So are these different offers evidence of rampant sexism on BofA's part? Hardly. The pitches were the result of complex and largely secret scoring systems that most financial institutions use to boost profits while limiting losses.


You've heard by now of credit scores, the three-digit numbers lenders use to gauge your creditworthiness. Credit scores predict how likely you are to default on a credit account or loan; they're used to help set interest rates and terms.


What you may not know is that credit scores are just the start of the way financial institutions evaluate you, and they're not even the most commonly used scores -- far from it.


While a credit card issuer might check your credit scores once a month as part of its regular account review process, the same company probably checks other kinds of scores every time you pull out your plastic.


"Every single transaction has some sort of score being generated," said credit scoring expert John Ulzheimer, president of Credit.com's education services and author of the book "You're Nothing But a Number." "Generally they're checking whether the transaction is likely to be fraudulent, but there are other reasons as well."


You're being judged by the type of transactions you make, how you pay your bills, how much profit you generate for your lenders and a host of other factors. The scoring formulas might be created by the credit bureaus, third parties or the lenders themselves. Banks and other financial institutions are tight-lipped about many of the details of these other scoring systems, but they're used to determine:


* The kind of credit card offers you get.

* Whether your credit limits are raised or suddenly lowered.

* Whether your over-limit credit or debit transactions are approved.

* Whether your card issuer calls you about a suspicious transaction, blocks it or shuts down your account.

* How cooperative your issuer is about waiving fees or lowering your interest rate.

* How quickly your issuer calls you if your payment is late.

* Whether a collection agency contacts you about an old debt and how hard it pushes.


Your credit scores are just the start.


Here are some of the ways you might be scored, roughly following the life cycle of a credit account. You're very familiar with credit-risk scores, but the other eight rarely see the light of day.


Credit-risk scores: These are the credit scores most of us know. The leading credit score, the FICO, was created by Fair Isaac and ranges from 300 to 850, with scores over 700 generally considered to be low risk.


Response score: This score predicts the likelihood a consumer will respond to an offer of credit, such as a new card or a balance transfer offer. Credit card issuers use response scores to decide whom to target and how to customize offers to appeal to particular consumers, said Chisoo Lyons, vice president for analytic research at Fair Isaac, which created the leading FICO credit score as well as many other scoring formulas.


Application score: This score scoops up data from your credit application that's not included in your credit scores, said Ulzheimer, who worked for Fair Isaac and for credit bureau Equifax before joining Credit.com. That data include how much you earn, how long you've lived at your current address and how long you've worked for your current employer. Application scores are typically used in combination with other scores, such as credit and bankruptcy scores, to determine whether to open the account, what rate to give and how much credit to extend.


Bankruptcy score: Credit scores typically predict the chance you'll miss a payment in the next two years. Bankruptcy scores predict the likelihood you'll throw in the towel on your debt entirely and file for Chapter 7 liquidation or a Chapter 13 repayment plan, said David Rubinger, spokesman for credit bureau Equifax, which produces the leading Bankruptcy Navigator Index or BNI. BNIs range from 1 to 300, with the higher the score, the lower the predicted risk. Most lenders use both credit scores and bankruptcy scores, Ulzheimer said, to help assess the risk that you won't pay.


Revenue score: Lenders want to maximize the profitability of each account, and one way they do that is to gauge how much money each account is likely to generate.


Continue to 8 Secret Scores That Lenders Keep Part 2



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8 Secret Scores That Lenders Keep Part 2

Attrition-risk score: Attrition risk refers to the likelihood a user will stop using a card, and attrition-risk scores are typically used in combination with other scores to determine what to do next if you look ready to bolt. If your account generates a lot of revenue and is deemed at low risk for default or bankruptcy, for example, the issuer might aggressively try to keep your business by jacking up your credit limit, lowering your rate and pelting you with convenience checks. If your account isn't that profitable or is deemed risky, on the other hand, the issuer might just let you go.


Behavior score: Credit scores provide a snapshot of how a consumer is handling all of his or her credit accounts. Behavior scores, by contrast, typically focus on a single account (the one you have with that particular creditor) but take in a broad view. Does the user pay off her bills every month, carry a balance occasionally or frequently pay only the minimums on her cards? That information typically isn't available on a credit report, but is contained in the issuer's databases, along with other data that helps the score describe how she handles her account. A behavior score might be used in conjunction with other scores, such as credit or bankruptcy scores, to decide whether an overdue payment is an aberration (maybe he's traveling?) or a sign of impending financial crisis (maybe we should call the consumer today and find out what's going on).


Transaction score: These are the scores run each time you use your plastic to determine whether the transaction should be approved. Issuers are typically looking for signs the transaction might be fraudulent, but transaction data can be used in other ways as well (more on that in a minute).


Collection score: You've failed to pay for long enough that your card has been turned over to a collection agency. These agencies use collection scores to assess the likelihood that you'll be able to pay them and sort their list of debtors accordingly. Collection agencies watch for all kinds of evidence that your financial situation may be improving, Ulzheimer said, from better credit scores to another collector's account suddenly being reset to 0, indicating it's been paid off.


If, on the other hand, your credit is in the dumps or the amount involved is small, the collection agency may make minimal effort.


"Why spend time and effort to track you down if you're not likely to pay?" Ulzheimer said. "Probably the most cost-effective (tactic) is to write you a letter, put it on your credit report and wait for you to call them."


Waiting, watching, hoping...


As several of the previous examples show, lenders and others often combine different types of scores to assess you. Sometimes the evaluations become pretty sophisticated.


One scoring model sold to lenders, the TRIAD Transaction Score created by Fair Isaac, takes into account credit risk, attrition, potential revenue and patterns in the user's charging behavior that might indicate higher or lower risk.


Let's say you typically spent $1,000 a month on your credit card, usually on toys, clothes and eating out at family restaurants. Then one month your spending changes -- you still spend $1,000, but now it's to get cash advances, buy groceries and gamble at the local racetrack.

The scoring formula may decide you've gone from Stable Family Guy to Desperate Unemployed Guy and flag the issuer that you've become a higher-risk customer.


Instead of a single three-digit number, TRIAD generates three numbers. Typically the scores will include a credit-risk score and an attrition score, both somewhere on a scale of 50 to 999 with higher numbers being riskier, plus a dollar figure to indicate the account's potential revenue generation.


If the issuer decides the risk of your default outweighs the profits you generate, it might reduce your credit limit. If you're a profitable customer, on the other hand, the card issuer might wait awhile to see if your situation improves.


Yes, it is rocket science...


How issuers decide what to do with the scores depends on their companies' policies, and even those are often changing targets. Credit card issuers constantly tweak their systems to maximize profits and minimize losses.


"Those guys at NASA have nothing on the Ph.D.s who work for credit card companies," Ulzheimer said. "They're Mensa-level smart, and they are very, very sophisticated in the ways they use credit data."


Which is not to say issuers, or the scoring systems they use, never make mistakes. Case in point: an issuer sending two different offers to the same household, as they did to ours. Most issuers use software to make sure that doesn't happen, Ulzheimer said; they don't want us comparing notes. (Bank of America didn't return my calls about the issue.)


In fact, financial institutions in general aren't eager to reveal how they make the decisions they do -- and that's not likely to change soon. While you have a federal right to see your credit scores, that's not true with other scores, which lenders often consider proprietary information.


Is that a crisis for consumers? I have mixed feelings about that. You clearly need to see your credit scores, since they influence so much of your financial life across the board. But given how many of these other scores are in use, how different they are and how many ways they're applied, I'm not sure I really want to see them all.



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