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College Students and Recent Grads

College Students: Employers Check Your Credit Report, Not Credit Score

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Female Woman Sitting At Interview

The summer after my college graduation I came face-to-face with the reality of needing a good credit report and strong credit score. As a naïve co-ed, I’d never truly pondered the consequences of using a credit card. All I knew is that utilizing it properly would help build something called credit history. A fact I became familiar with after my father insisted I get a credit card my freshman year of college.

Pushing a credit card on an 18-year-old college kid may sound like bad form to some, but my father’s strategy was sound.

I entered college with no student loans thanks to a combination of parental support and scholarships. With this in mind, my father suggested I get a credit card in order to start establishing credit history.

He took the time to walk me through the important points of credit card use:

  1. Don’t max it out
  2. Pay it off in full each month (aka only buy what you can afford)
  3. If you only pay the minimum then you’re just throwing away money in the form of interest to the banks

Thanks to his foresight, I graduated college with no debt and a 720 credit score from the responsible use of one credit card. At the time, I only recognized the no debt part; I never thought to check out my credit report and score (rookie mistake).

Fast-forward three weeks and my new roommate and I were pounding the streets of New York City looking for suitable housing. We hit up Craigslist, tried referrals from friends and ultimately succumbed to using a broker to help us find an apartment. When we finally found a roach-and-rodent-free apartment in our price range, we scurried back to the broker’s office to submit the paper work. She looked up at us and said, “And we’ll need $50 to run your credit check?”

“Huh?” I thought to myself while wondering how much an unexpected $50 would damage my budget.

“Your landlord will need to see your credit report and score to determine if you’re a responsible tenant,” she emphasized.

“What is she talking about?” I thought (probably aloud).

This is when I realized my Dad’s advice to get a credit card was some of the best he’d ever given me. Thanks to him, I had a 720 credit score (instead of no credit score) and was able to get my first apartment with minimal stress.

So, why does this matter for the average college kid?

Landlords aren’t the only ones using your credit report to see if you’re responsible: employers do too.

Note that a credit report is different than a credit score. The score is merely a gauge of what is reflected on the report. The credit report is a thorough history of your life as a borrower and includes details on things like: loans, credit cards, mortgages and if any of your bills went to collections.

Why do employers want to see your credit report?

There are a variety of reasons an employer may run your credit report.

  • To see if you’re responsible
  • To verify you are who you claim to be
  • To determine if you could handle a company credit card
  • To see if you’re financially stable – even though your bank account information is not reflected in this report, they can see your loans and how you utilize credit cards

In fact, the use of pulling a credit report is two decades old, according to Experian spokeswoman, Kristine Snyder. (Experian is one of the three credit bureaus.)

“Some companies have been using them for 20 years, mostly when they hire people who will be dealing with money.  Traditionally, the biggest users of credit reports for employment purposes are companies in the defense, chemical, pharmaceutical and financial services industries because of the sensitive positions many of their employees hold,” wrote Snyder in an email.

Will you know if they run a credit report?

Yes.

“Federal law does prohibit anyone from accessing an employment report without first obtaining written permission from the consumer,” Synder emphasized.

What can employers see when they get a credit report?

Experian offers a report called Employment Insight, specifically for employers.

According to Synder, this report contains:

  • Consumer identification: including Social Security number
  • Address information: including length of time at current and previous addresses
  • Employment information: providing insight regarding an applicant’s previous work history
  • Up to two places of employments
  • Other names used: such as maiden names and aliases
  • Public record information on bankruptcies: liens and judgments against the applicant
  • Credit history providing an objective overview of how financial obligations are handled
  • Demographics Band (including driver’s license and phone number verifications)
  • Profile Summary (including payment patterns)

What will be kept private from an employer?

  • Your credit score – but they can probably make an educated guess based on the information in your report.
  • Your year of birth
  • Information about a spouse
  • Account number information

What if you don’t get hired?

The credit bureaus don’t offer any sort of recommendation about whether or not to hire you with your credit report. It’s simply supplemental to other portions of the interview process: skills tests, in-person interview, references, etc.

However, if you aren’t hired based on information in your credit report, then federal law does require your potential employer to give you both a copy of the report and a written description of the consumer’s rights.

Why it won’t impact your credit score

Don’t fret about this damaging your credit score. Your employer performs what is known as a soft pull (or soft inquiry), which doesn’t cause any sort of drop in your credit score nor is it reflected on your credit report moving forward.

Moral of the story

Bad credit history can impact more than just your ability to get a credit card or a lower interest rate on a loan. It could actually prevent you from getting a job. If you have questions about building credit start here and then check out our Fine Print Blog for plenty of articles on ways to build and improve your credit history.

Got questions? Get in touch via TwitterFacebook, email info@magnifymoney.com or let us know in the comment section below!

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Erin Lowry
Erin Lowry |

Erin Lowry is a writer at MagnifyMoney. You can email Erin at erin@magnifymoney.com

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Pay Down My Debt

Introducing FICO 9: What This Means for You

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Yesterday, FICO announced that it will be releasing FICO Score 9.  If you have unpaid medical bills or other collection items, this change will impact you.

What is FICO?

FICO is the most widely used credit score in the country. 90 percent of all credit decisions (mortgages, cards, credit cards, personal loans and more) use the FICO score in some way.

So, when FICO makes a change to its score, we should listen. This score has a big impact, because lenders use it and others (like CreditKarma) are trying to approximate it.

What are they changing?

This change is huge for people with unpaid medical bills and other collection items.

Unpaid medical bills

According to Experian, 64.3 million Americans have a medical collection record on their bureau. In the current world, this can significantly harm their credit score.

If you have an unpaid medical bill, it can be reported to a credit bureau in two ways:

  • The medical service provider can report to the bureau, or
  • A third party debt collection agency that has purchased the debt, or has been contracted to collect the debt, can report it

99.4 percent of cases have been reported by collection agencies. So, if your doctor is calling you to pay – it probably hasn’t been reported to an agency. But, once a collection agency starts calling you, you probably have a negative item on your credit bureau.

The purpose of a credit score is to help lenders understand the likelihood of someone being responsible and paying back on time. There has been a widespread belief that people have been unfairly punished for medical bills. In fact, the CFPB has proven that people have been unfairly punished, in a May 2014 report.

With the new score, FICO is agreeing with the CFPB. Medical collections will now be differentiated from non-medical collections. And people will be “punished less” for medical collections. This makes sense, for three reasons:

  1. The medical system is complex, and many people have been hit with small medical collections that they didn’t even realize they owed. For example, with a small co-pay that ended up with a collection agency.
  2. Historically, many responsible people could not get insurance because they had a pre-existing condition. And, when medical disaster struck, they had no way to pay the medical bills. They tried to be responsible, but couldn’t.
  3. Even with insurance, multiple emergencies in a family can lead to large deductible payments. Doctors and hospitals can quickly turn over bills to collection agencies, resulting in a negative remark on the credit bureau. Even people who are just paying back their medical bills, responsibly, over time can be punished.

This is a big win for the CFPB. Hats off. A government agency has done the math for the industry, and the industry has agreed. This should result in better access to credit, and lower rates on existing credit – once (and if) the changes are accepted by the industry.

Paid Collection Accounts will now be bypassed

Beyond medical bills, many other types of debt can end up on your credit bureau. For example, failure to pay your utility bill, your phone bill, your overdraft or any other type of debt can result in your account being sold to a collection agency. And the agency will usually report the collection account on your bureau. Having these accounts can seriously harm your score.

But, the older the collection item, the less impact it has on your score. I have regularly met people who felt confused. They have recovered and now had money. Should they pay back that five-year-old collection item, or just let it age. They wanted to pay it back, but would receive advice from some people not to do so. Why? Because activity on a collection item could make it appear more recent.

This change removes all ambiguity. If you pay back your collection items, your score will benefit. This is the way it should be.

When will I see the impact

Unfortunately it will take a while. FICO sells its credit score to banks. Whenever a new score is introduced, a bank has to decide whether or not to upgrade. In order to make this decision, they need to do a lot of analysis.

First, they will perform a “retro” analysis. This means they will look at the past few years of their portfolio history, and they will estimate how the portfolio would have performed if the new score was used.

They will then need to build strategies, which includes the cutoff (above what score will they approve accounts), the pricing and the extra rules that they want to build. In my experience, this takes 12 to 18 months (there are so many committees that need to approve this!).

Banks are very eager to “swap in” new customers. So, if previously rejected customers can now be approved, banks will be keen to proceed.

They are less keen to charge people lower interest rates. So, the CFPB needs to watch the banks closely. If people are truly lower risk, they should pay lower prices. But, banks are not eager to reduce pricing.

In Conclusion 

We fully support the changes. Medical bills are being severely punished. And people should not be afraid to pay off collection accounts.

We are realistic: it will be a while before we feel the impact.

And we are rightly skeptical: banks will be happy to approve more people and give more credit. They will be less excited to reduce interest rates.

Got questions? Get in touch via TwitterFacebook, email info@magnifymoney.com or let us know in the comment section below!

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Nick Clements
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Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

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Fine Print Alert

Fine Print Alert: August 8, 2014

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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In our weekly Fine Print Alert newsletter we call out good news from the financial community and shine a spotlight on any sneaky changes or less than favorable strategies employed by financial institutions.  We also wrap up MagnifyMoney news and share our favorite reads from the week.

Fine Print Alert

The good

Story One:

Last night, FICO announced a change to their scoring model. FICO Score 9 will usher in a more nuanced way to asses:

  • Consumer collection information
  • Bypassing paid collection agency accounts
  • Differentiating medical from non-medical collection agency accounts

What does this mean for consumers?

FICO’s change will make it easier for those plagued by medical debt to have their score increased and ultimately get access to loans with more competitive interest rates (or any loans at all). Medical collections will have less impact on the overall score and according to FICO’s press release,  “the median FICO Score for consumers whose only major derogatory references are unpaid medical debts is expected to increase by 25 points.”

It also means FICO will remove any record of a collections on a consumer’s account once it is paid in full. The history of being in collections will not count against someone as they move forward to improve their financial health and perhaps get a loan at a much lower interest rate.

Story Two:

Credit unions have grown to 100 million members.

Credit unions still only account for 7.4 percent of banking assets and barely scratches the surface of heavy hitters of commercial banking who hold $14.8 trillion in assets.

However, this news shows a positive trend in people finding financial institutions more interested in serving their customers than their shareholders. (Credit union members are the credit union owners).  Credit unions typically offer lower interest rates and waive a majority of fees charged by the big banks

The not so good

We’re big supporters of Internet-only banks here at MagnifyMoney, but a recent article from Consumer Reports made us feel a little peeved with some of our favorite financial institutions.

Consumer Reports outlined that Federal regulations require banks to make funds from checks available within three business days. More specifically: “In general, the first $200 of a deposit must be available for cash withdrawal or check writing the next business day. The rest should be available on the second day for check-writing purposes and on the third.”

These regulations were made prior to the rise of Internet-only banks, allowing for a loophole when it comes to these online banks making funds available to consumers.

According to Consumer Reports, Go Banks holds personal check funds for up to 10 days.

We’re currently investigating which Internet-only banks take advantage of this loophole and plan to integrate this information into our transparency scores of the banks.

The controversial

Owners of the Oasis Cafe in Minnesota have levied a $0.35 charge against their customers to help cover the cost of an increase in minimum wage. The small business says it will cost them $10,000 to pay 12 employees the increased wage, so they need a little help from their customers. Some customers have boycotted the establishment in outrage over paying 35 cents, while others see it as a small business just trying to stay afloat and keep their employees. Watch the full video from CNN Money here.

Let us know what you think in the comments!

MagnifyMoney around the web

Our favorite personal finance stories this week

Ending bank tricks would be music to my ears – “To find the scurrilous activity that really takes the cake in the category of “How is this thing STILL legal?” you’ve got to turn to banking and the little-known — but highly profitable — practice of “check ordering.” Brian O’ Connor of The Detroit News shares some ludicrous laws while making an impassioned plea to change the rules on overdraft fees.

Why the Finance Industry Needs to Earn Women’s Trust – Recent research from The Center for Talent Innovation found that, “American women, despite being among the most financially literate women in the world, are 44 percent less likely than American men to consider themselves knowledgeable.” Read tips on how woman can close the confidence and trust gap on Go Girl Finance.

Summer Job? Time to Start a Roth I.R.A. – “In some families, teenagers contribute to basic costs like housing. In others, parents expect summer earnings to replace a weekly allowance. Many teenagers save for their first car, and few among the college-bound escape the pressure to put money away for tuition….It’s rare, however, that families consider the possibility of giving a child a running start on retirement savings.” Ron Lieber of The New York Times elaborates on the benefits of starting a Roth I.R.A. before even heading to college.

Don’t Carry a Balance on Your Credit Cards – “As far as I’m concerned, there is no catch [with credit card churning]. For me. But I told him you really can’t carry a balance on those cards since the interest rate is so high. Then my clever, educated brother told me always carries a balance each month since it’s good for his credit score. Wrong.” We love Mel is helping dispel this awful rumor on her site Broke Girl Rich.

The 15 Questions of Debtors Anonymous – “I bet you didn’t know there was a Debtors Anonymous, huh? Indeed there is though, and it sounds like an awesome resource. Here’s a brief bio from their website (DebtorsAnonymous.org):

“Debtors Anonymous offers hope for people whose use of unsecured debt causes problems and suffering in their lives and the lives of others… For many it is a false crutch that feeds fantasy and magnifies obsession… In D.A., our purpose is threefold: to stop incurring unsecured debt, to share our experience with the newcomer, and to reach out to other debtors.” It makes sense the anonymous blogger J. Money from Budgets are $exy would bring this to our attention. We think it’s great a support group exists for those struggling with debt.

Got questions or tips for the Fine Print Alert? Get in touch via Twitter, Facebook, email info@magnifymoney.com or let us know in the comment section below!

 

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Erin Lowry
Erin Lowry |

Erin Lowry is a writer at MagnifyMoney. You can email Erin at erin@magnifymoney.com

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