Credit Reports: A Window to the Soul?
August 25, 2008
What is a credit report? Why are they so difficult to understand? Why are they so long? We could go on and on illustrating the types of questions we are asked on a daily basis about credit reports. And with good reason. They are difficult to understand. Further, understanding what constitutes good and bad credit is a moving target depending on what job an applicant is being considered for and no one can provide a solid definition or litmus test for determining such. Rather than attempting the impossible task of defining good and bad credit or what on a credit report makes an individual ineligible for employment, I spoke with Maxine Sweet, Vice President of Public Education at Experian to get a true insider’s perspective of this tool. Let’s start with a few definitions and then we’ll look at how this information is best applied to an effective employment screening strategy.
Employment Credit Report v. Consumer Credit Report
Did you know that there are two distinctive types of credit reports commonly issued by the credit bureaus? One is the standard credit report and another is a credit report that has had certain information suppressed so that it can be used for employment purposes. Here are the differences:
- Credit Score – the credit score is an algorithm or equation developed by credit scoring companies, such as Experian Decision Analytics or Fair, Isaac Corporation. Contrary to popular belief, credit bureaus do not develop or formulate the algorithm. Credit scoring algorithms are proprietary to the risk score developer and are not known by the credit bureau. They are called credit scores because they use information from a credit report to do the calculation. Credit scores are tools used by lenders to analyze the information in a credit report. Credit scoring is an entirely separate process from credit reporting, and credit scores are not part of a credit report. That myth has evolved because lenders typically have the scores printed with the credit report, and so the scores appear to be part of the report, when in fact credit scores are the result of an entirely separate process. Credit scores cannot be used for employment purposes. Therefore, a credit score will only be provided on a Consumer Credit Report (not on an Employment Credit Report).
- Account Numbers – account numbers are purposely left off an Employment Credit Report. This is for the protection of both the applicant and the employer. An employer would have no need to access their applicant’s account numbers. Lack thereof in the Employment Credit Report mitigates the risk of an un-authorized person accessing such information and doing significant damage and as we all know the protection of data is a hot topic these days.
- Hard Inquiry v. Soft Inquiry – each time a Consumer Credit Report is accessed a record of that access is added to the credit report. That record is called an inquiry. There are two different types of inquiry. Inquiries resulting from your application from credit can be shown to others when they request a report, and are often referred to as “hard inquiries.” Hard inquiries can count against a consumer’s credit scores. Recent hard inquiries mean you may have taken on new debt which has not yet had time to be reported in your accounts. The more hard inquiries, the more debt you may be taking on, which is an indicator of risk. However, inquiries are a minor factor and are only significant if they occurred in last few months. The second type of inquiry is not shown to others, and so has no impact on a lender or employer decision or credit scores. Soft inquiries are a record of your report being accessed when you have not applied for credit. They include pre-approved offers, account management, reports for employment purposes and requesting a copy of your personal credit report. An Employment Credit Report inquiry, therefore, does not count against an applicant’s credit score.
Because EmployeeScreenIQ focuses solely on employment screening, we only offer Employment Credit Reports. This means that your candidates can rest assured there will be no adverse impact on their borrowing capability resulting from your employment screening strategy.
What Information does an Employment Credit Report Reveal?
An Employment Credit Report reveals the following information:
- A Profile Summary showing information such as total number of active lines of credit or accounts, number of delinquent accounts, liens or judgments, etc. While it is important to review the entire report, we typically tell our clients to start with the Profile Summary, which could be considered the “dashboard” of the report. It shows the number of public records an individual has, if any, and reveals monthly payment obligations such as mortgage payments and revolving credit (credit card obligations for example). It also reveals the percentage of revolving credit available to the consumer in relation to the maximum currently available. So if your applicant has a credit line of $5,000 and they have borrowed $2,500 against that line, it will show that they have 50% of their revolving credit available. The summary also shows the number of accounts in good standing and the number of delinquent accounts, both current and in the past.
- The Public Records section follows the Profile Summary. This will list any existing liens or judgments that have been reported to the credit bureaus, if any. These may include any suits or judgments against a consumer in regards to their failure to make proper payments to a creditor and/or bankruptcies.
- The next area is the Trades/Account Status report which details the balance for all lines of credit (active and inactive). This may include accounts such as mortgages, car loans, credit cards, bank accounts, etc. The account status descriptions include when the account was opened and closed (if no longer active), a monthly payment history, any existing balance, whether the account is/was considered in good standing, etc.
Okay so now we know what we are looking at. How do we go about making a decision? Before we answer this question, it makes sense to evaluate the theory behind credit report evaluation. According to Maxine Sweet from Experian an employment credit report is one tool that an employer should use to evaluate a candidate’s personal responsibility. Sweet says, “A credit report will not automatically tell you that you should or should not hire a candidate. Instead, in simplified terms, it will highlight whether they have paid their bills when they said that they would.”
When asked who should get a credit report Sweet indicated that the most common candidate for a credit report should be someone who is being considered for a position where they will be exposed to financial records, books, etc. and those that will be entrusted with large amounts of money or financial responsibility. However, with proper consent, employers have the right to evaluate credit reports on any candidate. How each candidate manages their own personal finances can be an indicator of how responsible they will be in managing a company’s assets. If an employer is considering several candidates with comparable resumes, their credit management skills can be a distinguishing factor.
I asked Maxine what employers should pay closest attention to on the credit report and she indicated that the Profile Summary was a great place to start. She thinks the most important questions to answer are:
- Does your candidate have public records (liens, judgments, bankruptcies)?
- Do they pay their bills on time?
- Do their monthly payments exceed the salary you intend to offer?
- And have they maxed out their available credit so that they are stressed with excessive financial obligations?
Once you have been able to assess this information, you can evaluate whether they are suitable for employment. In the event of adverse information, some employers choose to discuss some of the concerns with their candidates and ask for explanations.
Lastly, as we discussed earlier, a credit score cannot be used in the hiring decision; however, Sweet indicated that employers can develop their own evaluation system that is applied indiscriminately based on what information is important to them and then use that scoring system consistently across the board.
What tools do EmployeeScreenIQ clients have available to them for further support on credit report-related issues and questions? First and foremost, our Client Relations Department is available to answer any questions by phone or email. For independent research, clients are invited to the “Resources” page of our website www.EmployeeScreen.com. There we have sample reports with explanations of each field found on a credit report. We have a glossary of terms and codes furnished by the credit bureaus as well an FAQ manual. The credit reporting companies have Web sites with extensive education resources for consumers, such as sample consumer reports, answers to frequently asked questions, and advice columns, such as Maxine Sweet’s Ask Max (www.experian.com/ask_max) on the Experian Site.
The bottom line with credit reports is that there are many questions that arise when using them. It is important to know that you are not alone and we invite inquiries when you run into barriers. As always, we will be able to help you review the report and what the information reveals. What we cannot answer is how you should treat the information found or whether your candidate should be hired or disqualified. That decision should be a result of combining all the information gathered throughout your hiring process, and weighing it as a whole against the duties and responsibilities of the position.
Nick Fishman is Chief Marketing Officer, EVP for Cleveland-based EmployeeScreenIQ, a best practices provider of pre-employment screening services throughout the U.S. and worldwide. Nick can be reached at (800) 235-3954 ext. 441 or email@example.com.
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