How Employers Use Credit Scores to Determine Hiring Risk
Nowadays, your credit score has more impact over your life than ever before. Your credit score can make it difficult for you to do one of the most important things for happiness and financial stability in life. That's why it's so important to know how employers use credit scores. Your credit score can make it difficult for you to get a good job. It's important to know that employers use credit score to determine hiring risk. If your credit score is poor, you might yourself getting routinely passed over for good jobs. There are numerous reasons why employers consider credit score a good gauge for hiring risk. The important thing is that you know how employers use credit score.
Having a poor credit score creates a vicious cycle. When your credit score is poor, you may be looked on as a risky employee. You'll struggle to find a good job. You'll also struggle to bring in the income you need to improve your score. You need to be proactive at optimizing your score to avoid these problems. Also, you need to understand your credit score in order to actually figure out how it can impact your life both positively and negatively.
There are numerous things you can do to start improving you credit score today. The first step is to understand how employers use credit scores. You also need to inform yourself on what factors influence your credit score. The next step is to start making improvements.
Justification Behind How Employers Use Credit Scores
There are numerous aspects to how employers use credit scores and why employers use credit score in hiring decisions. You might at first feel that it's unfair or irrelevant. However, a lot of employers do consider that a poor credit score means an unpredictable employee.
Credit score is more important for some types of job than for others. If you are working on a freelance basis or as a self-employed person, your credit will be less important for finding work. However, if you are working full time for a company as an accountant, lawyer, or administrator for example, credit is likely to be considered.
Statistics show that around 60 percent of companies now use credit checks in hiring. Credit checks are increasingly more likely with higher paying and higher prestige positions. While credit checks are common, they are prohibited in some states. You might want to check your state's laws regarding hiring to see how employers use credit scores in your state according to the law. You should also know that your potential employer has to tell you before checking your credit history.
The following are some of the biggest reasons why employers consider credit.
Responsibility
Employers consider that a potential new hire is more responsible if he or she has good credit. This has a big impact over how employers use credit scores. Strong credit is the result of responsible traits like organization, discipline and vigilance. Failing to keep up with debts is a sign for many of a lack of responsibility.
Obviously, employers want to hire responsible employees they can rely on. Even if you show responsibility on your resume and school transcripts, poor credit can undermine these positives.
As you apply for jobs, you want to show yourself to be as responsible as possible. This makes strong credit a huge asset to your job candidacies.
Reliability
Good credit shows to employers that you are a reliable person. Employers consider that you can be relied on to pay your bills. They'll therefore also consider that you can be relied on to fulfill your job role.
Employers want reliable employees. They don't want to hire someone who seems erratic or unpredictable. This would put their company at risk. Reliably make all of your payments in full on time.
Of course, individuals don't always acquire bad credit because they are not reliable. They often acquire bad credit because of financial setbacks. Consumers may want to pay their bill but don't have the money at the moment. This is why it's always important to at least communicate with your creditor. If you are in touch with them, you can warn them of your financial struggles and sometimes adjust your payment schedule.
Stability
A strong credit history shows that you are stable. It indicates to the employer that you are stable financially. It also indicates that you're likely to be stable as an employee. You're less likely to be desperate to increase your pay and switch jobs frequently.
If you have poor credit, it says to the employer that maybe your work history has not been stable. They may think you have poor credit because you struggle to hold down a job. This is going to look very bad for your prospects of being hired.
Often, the best way to achieve strong credit is to stick with one job for a long time. This way, you could increase your earnings through periodic raises. You'll be able to rely on a regular paycheck. You'll therefore be able to plan for your credit account payments in advance. This creates the most stable possible financial situation for you.
Honesty
Employers may consider that poor credit makes you look dishonest. This is especially true if you have defaults or bankruptcies. These marks on your credit report show that you have not kept up with your financial commitments. Employers might consider that this increases the chances you won't keep up with work commitments.
Another issue regarding honesty is that employers may consider that financial problems put you at risk of stealing from the company. This might feel insulting because you would never dream of stealing from your employer. However, this is how many employers look at severely damaged credit.
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Issues That Damage or Strengthen Your Credit
You now know that employers consider credit when hiring. You also have some understanding of why they do this. Now you need to know what causes credit damage. When you're aware of the causes of poor credit, you can avoid them. You can apply this knowledge to the issue of how employers use credit scores.
There are numerous ways that credit becomes damaged. Of course, the bottom line is not paying bills. However, you could find that your credit is poor even though you never miss a payment.
Explore the issues that damage or strengthen your credit to better understand your score. Understanding this issues also will help you initiate a credit improvement regime. Here are five issues that could potentially negatively impact a credit score:
Every time you miss a payment or submit a late payment, it damages your credit. Your lenders and credit card companies usually notify the credit bureaus when you don't make your payment properly. Even if your payment is only late by a day, it could lead to a negative mark with some creditors. On the other hand, some creditors may give you a grace period of a few days. This means that they won't report a payment that's only late by a few days.
Regardless of any grace period you're given, you should get into the habit of making every payment early. While paying early won't boost your credit, it will minimize the chances that your payment gets reported as late for whatever reason.
How you're using your credit at any given moment impacts your credit score. Concerning credit use, your available credit versus used credit is the most important factor. Credit bureaus look at the percentage of available credit you're using. If all your credit cards are maxed out, your credit score is going to be poor.
Take a look at how much you owe on all your credit accounts. It might surprise you to know that you can significantly boost your score just by paying down your debt. This is one of the easiest ways to rapidly increase your credit score.
Some consumers don't realize that their credit is poor even though they've never missed a payment. This is usually the result of overuse of credit. Some estimates indicate that credit use could the determining factor regarding up to a third of an individual's score.
The highest credit scores are achieved by consumers with a diverse portfolio of credit accounts. Your score is going to be lower if all you have are credit cards, for example. However, your score will go up if you diversify your credit report. If you have a car loan, personal loan, and mortgage in addition to credit accounts, you'll enjoy a higher credit score.
Put some research into all the different credit account types there are out there. Then, you can consider if some of the account types you don't have could benefit you. Also, consider whether they are available to you.
You need to know that your score goes down every time there are hard credit inquiries on your credit account. Your credit gets an inquiry hit when you apply for a loan or credit card. This can be frustrating. A lot of inquiries makes you look like you're constantly out for more credit.
Be restrained when it comes to applying for credit cards. Don't apply for every offer you receive. If you have a lot of inquiries that are keeping your score down, the only thing you can do is wait. Over time, your score will go back up if you avoid applying for new accounts for a while.
A short credit history means a lower score. The highest scores are achieved by consumers who have been using credit for a decade or more. This is unfortunate for young people and professionals just starting out. There is not much you can do other than wait for your credit history to lengthen.
However, you can open an account as early as possible in life to start accumulating credit report data as early as possible. This is why it's a good idea for young people to open credit accounts at least by the time they're in college. Then, they'll have some credit history by the time they graduate and start looking for professional positions.
Ways to Improve Your Score
It's now time to form a plan for improving your score. From the information given above, perhaps you have discovered the reason why your credit is poor. It's important for you to analyze your situation and figure out the cause of a low score.
Which of the factors discussed above applies to you? Are all your credit accounts maxed out? Have you missed a lot of payments or defaulted? Have you only recently started using credits. It's important to ask yourself these questions. Perhaps your credit score is very low because all the issues mentioned above are leading to negative marks for you. In that case, it's time to get started cleaning up your credit.
The following are five things you can do know to be proactive about improving your credit.
Increase available credit
One of the easiest things to control presently and immediately is how much available credit you have. If you have cash available and a lot of debt, put your available cash toward your debt. This will quickly boost your available credit. It will also lead to increases to your score very quickly.
Pay off accounts
It you're currently paying off an installment loan, you can pay off the loan if you have available money to do so. This brings down the total debt load you're paying. It looks good on your credit report if you have a significant loan like an auto loan that has been paid off in full.
Once you pay off the loan, the account is closed and the lender notifies the credit bureau. That particular lender will be likely to lend to you again in the future since you have reliably paid off a previous loan from them.
Make all payments on time
It's time to get vigilant about your credit if your score is low because of missed payments. Never miss a payment again. If you miss payments because you're absent-minded, set up alarms to remind you. You can use your smartphone to set off an alarm when it's time to make a payment. This is a great way to avoid missed payments due to simple forgetfulness.
Check your report for discrepancies
If your credit score is low and you don't know why, there could be errors on your report. It's time to do a score check and a report check. Credit report errors are frustrating considering how employers use credit scores. Estimates show that about one in five people have an error on a credit report. Credit report errors are not uncommon. In severe cases, they can unfairly destroy an individual's credit score. You need to check your credit report and have any errors corrected. You might find that this quickly raises your score by a significant amount.
Open up new accounts
If you are able, open up new accounts. Opening up new accounts can both diversify your credit portfolio and improve your credit to debt ratio.
You might find that it's difficult to open accounts if your score is low. If this is th case, you can open up secured accounts. Secured accounts allow you to use collateral. You can ope up a secured credit card. You simply have to send in a deposit. The credit card company holds this deposit and issues you a credit card. The card is treated like a credit card, and the company will report to the credit bureaus. Secured accounts are a great way to easily boost one's score.
So, if you do opt for a new credit card, below you can take a look at some of the best options that are out there:
Final Thoughts
The sooner you bring up your credit score, the sooner you'll become more attractive to employers. You can use the information above to institute a regime for improving your credit. It can sometimes be challenging to improve one's credit. It requires careful planning and self-discipline. It also takes time. However, it is essential. Your credit score is so important in your everyday life. Now you understand how employers use credit scores. You don't want to be passed over for the perfect job simply because of poor credit.
The amount of money you make is a huge factor regarding financial health. Your job also has a huge impact on your quality of life. If you're working a job you don't enjoy, you'll be less likely to have a successful career and make good money.
Take a critical look at your budget. Also, research your opportunities to acquire credit and use it wisely. Use the information you know regarding how employers use credit scores. You could even use services from a financial advisor to learn more about improving your credit. Set yourself on a regime and stick to it. This is especially important if you are entering the job market soon or are currently looking for a good job.