How Credit Scores Can Influence Employment Outcomes

In today’s competitive job market, employers are increasingly relying on a variety of factors to assess potential candidates. Aside from the traditional evaluation of skills, experience, and qualifications, one aspect has started to play a significant role in the hiring process – credit scores. A person’s credit score, which traditionally served as a metric for lenders to gauge an individual’s creditworthiness, is now being used by employers to influence employment outcomes.

In this article, we will go into the emerging trend of employers considering credit scores during the hiring process and examines how it can impact job seekers’ chances of landing their desired positions. While some argue that credit scores can provide valuable insights into a candidate’s reliability and financial responsibility, others raise concerns about the potential for discrimination and its relevance to job performance.

The Connection Between Credit Scores and Employment

Employers in Australia, like in many other countries, have increasingly been incorporating credit checks into their hiring processes. While the practice of checking an applicant’s credit score remains a subject of debate and scrutiny, employers argue that incorporating background checks or credit checks into their hiring process can offer valuable insights into a candidate’s financial responsibility and overall character. However, it’s important for employers to obtain informed consent from job applicants before conducting these checks and to protect the applicant’s personal information in compliance with Australian privacy laws and anti-discrimination legislation.2

Here are some reasons why employers check an applicant’s credit score:

• Assessing Financial Responsibility

A person’s financial history can provide indications of their level of responsibility and trustworthiness. A good credit score is perceived as an indicator of how well an individual manages their finances, pays bills, and handles debts. Employers may view this as a reflection of how the candidate might handle their professional responsibilities, financial tasks, or sensitive company information.

• Positions with Financial Responsibilities2

In certain industries or roles where employees handle finances, budgets, or sensitive financial data, employers may emphasise credit checks more. For instance, positions in finance, accounting, or roles that involve managing company expenses and budgets might place greater importance on credit scores.

• Security and Integrity Concerns

Some employers may argue that credit checks help identify candidates who might be vulnerable to financial pressures or susceptible to fraudulent activities. In roles where employees have access to company funds or confidential financial information, a strong credit history could be seen as an added layer of security.

• Company Policy and Risk Mitigation

For some companies, conducting credit checks might be part of their standard hiring procedure, driven by company policy or risk management strategies. This approach could be seen as a preventative measure to reduce the chances of hiring someone with potential financial troubles.

Critics argue that it may lead to potential discrimination, as financial hardships or poor credit scores can be the result of various factors, including medical expenses, unemployment, or divorce. Therefore, relying on credit scores alone could disadvantage otherwise qualified candidates who have faced unfortunate financial circumstances beyond their control.

Moreover, studies have indicated that there might not be a significant correlation between an individual’s credit score and job performance, leading some experts to question the validity of using credit checks for employment decisions.

As the use of credit scores in hiring decisions remains a complex and evolving issue, some jurisdictions in Australia have taken steps to regulate or restrict the practice. For instance, in 2020, the Office of the Australian Information Commissioner (OAIC) implemented a series of reforms to enhance the privacy of credit reporting and restrict the use of credit information in certain employment situations. Both employers and job seekers must stay informed about the evolving legal landscape surrounding credit checks in employment.

Employment Credit Check: What You Need to Know

During an employment credit check in Australia, employers typically request permission from the job applicant to access their credit report. The process involves the following steps:

• Consent: Before conducting a credit check, employers are required to obtain the candidate’s explicit consent. This consent can be in the form of a signed authorisation or an electronic agreement.
• Credit Reporting Agency: The employer will then contact a credit reporting agency, which is responsible for compiling and maintaining an individual’s credit history.
• Retrieval of Credit Report: The credit reporting agency will provide the employer with the applicant’s credit report, which contains a summary of their credit history and financial behaviour.

The credit report obtained by the employer will contain various financial information, including:

• Credit Score: The credit score is a numerical representation of the applicant’s creditworthiness, based on their credit history and financial activities. A higher credit score generally indicates better financial management.
• Payment History: The report will show the applicant’s repayment history on loans, credit cards, and other debts. It includes details of any missed or late payments.
• Outstanding Debts: Employers may see information about the applicant’s outstanding debts and their total debt load.
• Public Records: If the applicant has any bankruptcies, court judgments, or insolvency agreements, this information will be visible on the credit report.
• Credit Enquiries: The report will list any recent credit enquiries made by the applicant, which indicates when they have applied for credit.

The act of an employer requesting an employment credit check itself does not directly impact the candidate’s credit score. It is considered a “soft enquiry” or “soft pull.” Soft enquiries do not affect credit scores because they are typically used for non-lending purposes, such as background checks or pre-approval verifications. Individuals can have multiple soft enquiries without any negative consequences for their credit scores.

Mitigating the Impact of Credit Scores on Employment

When an applicant’s credit scores are low, but an employment credit check is necessary for the role they are trying to apply for, there are several strategies they can employ to mitigate the potential negative impact:

• Emphasise Strong Qualification

Focus on highlighting your relevant skills, experience, and qualifications that make you the ideal candidate for the job. Demonstrating your expertise and competency in the field can help shift the employer’s attention away from your credit history.

• Communicate Credit Challenges Openly

If the job application requires consent for a credit check, consider addressing your credit challenges directly with the employer, if appropriate. Being open and honest about past financial difficulties can demonstrate your willingness to take responsibility for your actions and may provide context for any negative entries on your credit report.

• Highlight Past Achievements and Positive References

Provide references from previous employers or colleagues who can vouch for your work ethic, reliability, and trustworthiness. Positive professional references can carry significant weight and help counterbalance concerns arising from your credit score.

• Showcase Financial Responsibility Through Other Means

Offer evidence of your financial responsibility through alternative means. For example, you can present documentation of on-time rent payments, regular savings contributions, or a record of successful budget management. These indicators can showcase your ability to handle financial commitments effectively.

• Pursue Relevant Certifications and Education

Enrol in relevant professional certifications or courses to demonstrate your commitment to continuous learning and professional development. A strong educational background can bolster your application and provide evidence of your dedication to enhancing your skill set.

• Offer an Explanation for Credit Issues

If there were circumstances that led to a temporary dip in your credit score, such as a medical emergency or sudden unemployment, provide a brief explanation to add context to your financial history. Employers may appreciate your transparency and understanding of the situation.

• Prepare for an Interview

Be prepared to discuss your credit history if the employer brings it up during the interview process. Frame the conversation in a way that emphasises the steps you are taking to improve your financial standing and how your credit history does not define your professional capabilities.

Protecting Your Rights

Regulation of Credit Checks in Australia

In Australia, the use of credit checks in the employment process is regulated by the Privacy Act 1988, which includes the Australian Privacy Principles (APPs) that govern the handling of personal information, including credit-related data.

Applicants have the right to decline credit score checks in certain situations, and these key instances include obtaining explicit consent from the applicant before conducting a credit check. The employer cannot proceed with the credit check without the applicant’s consent. Additionally, credit checks should only be performed for roles where an individual’s financial responsibility is directly relevant to the job requirements. If the position doesn’t involve financial responsibilities or access to sensitive financial data, the applicant is well within their right to decline the credit check request.

To further safeguard applicants’ rights, the Australian Human Rights Commission (AHRC) advises employers against using credit checks in a discriminatory manner. If an applicant believes that the credit check requirement is being misused to discriminate against certain groups, they have the grounds to decline the credit check and raise a complaint.

Concerns about privacy and personal information are crucial, and applicants have the right to protect their sensitive financial data during a credit check. Applicants can communicate their concerns and look into alternative methods for the company to assess their suitability for the work without using credit checks if they are concerned about the security of their information.

Protection of Applicant’s Privacy Rights

The Privacy Act and APPs play a significant role in ensuring the protection of an applicant’s privacy rights. The Act emphasises purpose limitation, stating that credit checks should only be done for legitimate reasons directly related to the job requirements. Employers must also take reasonable steps to ensure the confidentiality and security of the personal information obtained during the credit check. Applicants have the right to access their credit information and request corrections if they find any inaccuracies. Moreover, employers should not retain credit information for longer than necessary for the intended purposes.

Both the Australian Human Rights Commission (AHRC) and the Fair Work Ombudsman (FWO) play crucial roles in enforcing fair hiring practices and preventing discrimination based on credit history,

Conclusion

Both employers and applicants need to be aware of their rights and responsibilities concerning credit checks during the hiring process. Applicants should feel empowered to ask questions about the necessity of credit checks for a specific role and seek guidance if they believe their rights are being violated. Transparency and fairness are essential for a smooth and just employment process.