Red flags and red herrings in job seekers credit reports

April 16, 2015

6 minutes to read

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Regardless of the size of your staff, a business is as good as the people who work there. When looking for new members for your team, it makes sense to find the most knowledgeable and reliable people possible.

Related: Secrets of Negotiation: How to Convince Creditors Not to Ruin Your Credit Score

But how do you quantify the responsibility? Since these traits are difficult to discern in resumes and cover letters, many hiring managers look at the candidate’s credit history.

If your knowledge of consumer credit is a bit fuzzy, don’t worry, a majority of Americans have a tenuous understanding of their credit. This article will show you how to find a candidate’s credit report, what it contains, and what you should look for during the hiring process.

How to extract an applicant’s credit report

First of all, you want to see an applicant’s credit report, not their credit rating. A credit score is a three-digit number derived from information contained in someone’s reports from the three major credit bureaus (TransUnion, Experian, and Equifax), and is usually calculated through a proprietary algorithm.

A credit score can tell you that someone has bad credit, but it won’t explain how it happened. This is an important distinction, because a bad credit score is not always the result of irresponsible financial habits.

When you are ready to retrieve the applicant’s credit report, you will need their written consent (as required by the Fair Credit Reports Act).

Then simply notify one of the three major credit bureaus that you are acquiring someone’s credit report for business purposes. Experian, for example, has a page dedicated to pulling credit reports on other people. Or, you can contact third-party groups such as StarPoint or ADP to perform credit checks on employees.

Related: How to correct errors on your credit report

Alternatively, you can do a “proxy order“by asking the applicant to request their own credit report and give it to you. People can do it for free once a year for each office via

What you will see on a credit report

The credit report will contain:

  • Basic information about the applicant (name, address, etc.)
  • Past and present lines of credit, such as mortgages, student loans, personal loans, credit cards and more. These sections will include account status, payment history, current balances, and additional details.
  • A list of recent credit requests, including date, company, and reason for the credit request
  • Public records, which typically include court judgments such as tax liens and civil actions
  • History of bankruptcy.

To get an idea of ​​the type of credit report you would receive, check out this Experian example.

red flags

When trying to assess whether that potential new hire has reliability issues, it’s best to look at their credit report from a long-term perspective. Some of the more revealing details will be found in the public records sections. If a person’s personal finances have deteriorated to the point that a court has had to intervene, it may be a sign of recurring fiscal irresponsibility.

True, a consumer can file for bankruptcy after an unforeseen event like a medical emergency, but many times he or she will file after being trapped by cyclical debt or overspending.

Likewise, a series of missed payments may indicate that the applicant has had difficulty meeting deadlines. Tax liens and mortgage defaults are also things that tend not to happen overnight, meaning that the applicant has had ample time to try to correct the situation.

red herrings

“The red herring”, a literary term, refers to a detail or event that seems remarkable at first glance but ultimately turns out to be unimportant. When it comes to credit reports, there are a lot of red herrings.

Consumer credit risk analysis is a notoriously capricious science. For example, only one missed payment on a credit card is enough to take someone from a credit score of “excellent” to “fair” or worse. Medical debt also deserves careful consideration, as these debts frequently penalize consumers and contain errors.

The message here is that a single missed payment in an otherwise flawless repayment history shouldn’t be alarming, even if an individual’s credit rating has been seriously affected.

Frequent credit checks are also another cause of credit penalties. If the consumer has an otherwise healthy profile and keeps their debt utilization ratios at safe levels, it is entirely possible that what is happening is a “churning” of credit cards just for rewards. This can indicate that someone is a smart consumer, as opposed to a spender.

Many millennials will likely have large installment loans on their credit reports, often over five digits or more. In many cases, these are student loans, not reckless borrowing.

Additionally, many negative ratings will stay on credit reports for a long time, often seven or ten years after the penalty first appeared on the report. It is quite possible that within this time the applicant has learned from his mistakes.

Additional considerations

If you decide not to hire someone based on the contents of a credit report, you will need to send that person a disclosure before adverse reaction. This is how you, as the employer, will inform the applicant of the refusal of employment due to the contents of a credit report.

The pre-adverse action disclosure should include both a copy of the credit report you received and a Federal Trade Commission document titled “A summary of your rights under the Fair Credit Reporting Act. “

You should also ask the applicant if they have recently reviewed the credit report for errors. According to the FTC, one in four consumers have errors on their credit reports.

If the candidate appears otherwise perfect for the vacant position, ask for an explanation of the negative scores on the credit report. Not only will you learn more about this person’s financial history, but you will gain valuable insight into how they are coping and recovering from setbacks.

Related: 9 Strategies To Improve Your Credit Score

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About Lois Mendez

Lois Mendez

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