Why Do Companies Check Credit Histories?

Though applying for a credit card and applying for a job might seem like unrelated events, they share one thing in common: The company to which you apply may request a copy of your credit report. Knowing how companies use this information can help you change your financial habits to work in your favor.

Your Payment History

To creditors, the most accurate indicator of whether you will make timely payments on a loan is your past payment history. So, they request a copy of your credit report when you apply for a loan to find out how often you make late payments. Your credit report also lets creditors know whether other companies have taken action against you for lack of payment. Such details on your credit report can decrease, but not necessarily eliminate, your chances of obtaining new credit. Paying your bills on time gives creditors more confidence that they will receive timely payments from you, making it one of the most effective ways to ensure they approve you for new credit.

Whether You Can Afford to Pay

Your credit report lists your past and current debts, including the amount you still owe on each debt. Using this information, a creditor can determine how much money you owe to creditors each month. If this amount is high in relation to the amount of credit you have available to you, creditors may take it as a sign that you don't have a lot of money to spare for more monthly payments, meaning you may make late payments on a new account. Keep your debt-to-credit ratio low by paying off debts while keeping credit accounts open. If you pay off the remaining $2,000 balance on a credit card with a $3,000 limit, for example, you eliminate $2,000 in debt while increasing your available credit by $2,000. If you close the account after paying off the card, you decrease your available credit by $3,000.

Length of Your Credit History

Creditors want to be able to predict your habits over the course of the debt repayment period. Even if you pay your bills on time and have a low debt-to-credit ratio, these may not be enough to secure new credit if your credit history is relatively short. Each creditor determines what constitutes a short credit history. This can be one of the most difficult hurdles to overcome when applying for credit since you can only change it with time.

Assessing You As an Employee

Whether or not you apply for a job that involves money handling, an employer may use your credit report to assess your responsibility as an employee. If your report shows a high debt-to-credit ratio, for example, some employers view it as an indication that you may be distracted at work or more likely to steal from the company to cover your debts. Employers must get your permission before checking your credit history. If information on your credit history negatively affects your employment, the employer must tell you this and give you contact information for the company that provided the information.