Unemployment can make it hard to pay bills, but failing to do so can damage your job prospects. Here's how to handle a potential employer’s request to run a credit check.

Job hunters, how’s your credit?

Many Americans these days are discovering the Catch–22 of unemployment. And that is: You might fall behind on your bills because you’ve lost your job, and you might not be able to land a new job because you’ve fallen behind on your bills. A fair chunk of employers want to examine your credit history before offering you a position or a promotion. Blotches there –– repossessions, collections, high credit card balances –– could cost you the job you want. For example, applicants for Transportation Security Administration airport screener jobs are rejected if they have more than $5,000 in overdue debt.

Recent statistics are scarce, but when the Society for Human Resource Management polled its members in 2006, 43% of their companies ran credit checks on some or all potential hires. That was up from 25% in 1998. Plenty of people don’t think that’s fair, including Rep. Steve Cohen, D–Tenn., and 26 of his congressional colleagues, who on July 9 introduced H.R. 3149, which would prohibit the use of credit information in most employment decisions. Two states, Hawaii and Washington, already do so.

Employers are more likely to use credit reports as a way to verify employment history and Social Security numbers, Greenblatt said. Lenders often verify employment when you apply for a loan or credit card, so a credit report is seen as a good way to double-check the employers listed on a job seeker's application.

But many companies do use credit histories as a way to weed through job candidates. In the private sector, the people most likely to have their credit reviewed are those who will deal with cash or valuables, or who are financial executives, said Greenblatt, a labor attorney with more than 30 years' experience in employee testing and screening.

The rationale is that people with big debts or other credit problems may be more likely to steal or commit fraud. Even if a job doesn’t involve money, some employers are convinced that people who manage their credit well are better workers than those who don’t.

"There’s a perceived correlation between a high debt load and the possibility of embezzlement, theft or malfeasance," said employment attorney Manesh K. Rath, a partner at Keller and Heckman in Washington, D.C., who advises companies about their hiring practices. "This is a widely held belief in the employer community."

But what's also driving the push to check credit is fear of lawsuits, Rath said, especially in businesses where employees have access to customers' money or possessions, including the banking, property management, hotel and home health care industries.

If a visiting health care worker steals something from a client’s home, for example, that client isn't likely to sue the offender in civil court. The client might instead sue the employer, which is perceived as having deeper pockets and responsibility for hiring the thief. "The employer will have a tough time defending itself," Rath said, "if it didn't take the simple measure of doing a background check." Private employers aren't the only ones poking into your files. One of the employers most likely to check your credit is the federal government, although it typically denies jobs or promotions only when the employee would have direct access to cash on the job or security clearances are involved. You don’t have to work directly for the government to be affected by its credit checks, however. A reader named Gene worked for a consulting agency that was hired to do some work for the Internal Revenue Service in Philadelphia. Two months after he started the IRS job, a government investigator told him his poor credit was endangering his position.

"I was advised to clean up my credit report if I wanted to remain a consultant," Gene said. "They gave me a month. There’s not a whole lot you can do to straighten up your credit in month." Gene insisted his credit "wasn't that bad to begin with . . . no defaulted student loans or bankruptcies or anything like that." But four months after he was hired, Gene said his employer told him not to report to work anymore. If you’re concerned about your credit history affecting your job prospects, here’s what you should know:

An employer needs your permission to run a credit check. The Fair Credit Reporting Act requires your written permission anytime an employer hires a third party to conduct a background check, said human-resources consultant and attorney Wendy Bliss. That includes running a credit report. Of course, you likely won't get the job or promotion if you don’t give permission. But failing to get your OK before getting a report is an FCRA violation.

Although other black marks can be used against you, a bankruptcy, technically, cannot. Under Title 11 of the U.S. Code, employers are prohibited from discriminating against someone who has filed for bankruptcy. Because most people have trouble paying their bills before they file, this is often a moot point -- the employer can point to the history as the reason for the adverse action. If an employer cites your bankruptcy as the reason you were fired, not hired or denied a promotion, though, you might want to consult a labor attorney about a lawsuit.

An employer is supposed to tell you if credit information is used against you. If an employer uses credit information to deny an applicant a job, fire a current employee, rescind a job offer or cancel a promotion, federal law requires the employer to do two things:

• Before the adverse action is actually taken, the employer is supposed to provide the worker with a copy of the report and an explanation of the worker's rights under the law.
• After the action is taken, the worker must be told which company provided the credit information, given contact information and told he or she has a right to dispute the report's accuracy.

Rather than go through all this, of course, many employers find a less-complicated excuse to give you, or they simply do not give you a reason why you weren't hired. Your ability to dispute the information may be of limited use. If the employer's decision was based on erroneous data in your credit report, for example, it could take you months to get the problem corrected -- by which time someone else will have been hired for the position you had wanted.

That's another reason it's important to check your credit reports at least a couple of times a year and challenge any serious errors you find. All that said, a couple of late payments aren't going to kill your job prospects. Employers who care about credit histories typically look for serious negative marks, such as collection actions, repossessions, foreclosures and evictions.

Liz Pulliam Weston