Given the housing destruction all throughout the country these past 4-5 years, it’s not uncommon for people to have lost their homes to foreclosure or short-sale. One’s credit score usually gets demolished by 200 points or more, and stays that way for 3 years or longer.
One of my close friends named Tom, decided to follow through on my getting laid off plan because he’s burnt out and no longer has the desire to work in software sales anymore. He’s got enough income saved up to last him for about 2 years if he maintains his current lifestyle, which is not lavish by any means.
If Tom successfully engineers his lay off, he wants to travel for 6 months, and then see if he can find a job in sales at one of the big internet/tech companies such as SalesForce or Google. Given his income will literally go to 0, except for his 6 months severance, and $1,800/month in unemployment benefits, he no longer wants to keep paying for his underwater condo he bought at the top of the market.
Tom’s payment is around $4,500 a month (includes property taxes and HOA), which was digestable when he was making $10,000 a month after taxes. But now that he has barely any income, he finds it a big waste to spend so much to live in a 2 bedroom, 2 bathroom condo now that he wants to go travel. Without a job anymore, Tom no longer feels morally obligated to pay his mortgage, since the bank did agree to lend him the money based on the colateral value of the property. Besides, California is a non-recourse state, meaning that the bank can’t go after Tom’s other assets.
ARE CREDIT CHECKS FOR NEW HIRES APPROPRIATE?
Six months from now, Tom will want to re-enter the workforce. With the relationships he’s cultivated and the skills he’s developed over the past 8 years, he strongly believes he has a good chance of finding another similar-paying job. His only real worry is whether or not a company will decide not to hire Tom due to his poor credit score if he short-sales his condo.
Tom’s current credit score is “somewhere in the 700’s“. He doesn’t know for sure because he hasn’t checked his credit since he bought his house 5.5 years ago. Anything above 720 is considered excellent. If Tom short-sales, he expects his credit score to drop to the 500’s range, which is absolutely horrible. Yet, Tom himself, is a hard working, honest, and nice guy. Should he be punished for making a bad investment with a bank, given how ferocious the downturn was? Not many people forecasted such a big collapse. Did you?
Arguments For Why Credit Checks For New Hires Are Appropriate:
1) If you can’t handle your finances, you might not be able to handle the job.
2) One datapoint of many that gives insight into one’s character.
3) Might demonstrate a level of financial literacy, which is important with finance-related jobs.
4) Could be a signal that demonstrates reliability and responsibility.
5) Gives the employer insight into whether the candidate is desperate or not for money.
Arguments For Why Credit Checks Are Inappropriate:
1) It’s none of a company’s damn business what one’s personal finances are, so long as one does a great job for them. Nobody likes an invasion of privacy.
2) Unfairly penalizes people for deciding to buy a home during a time when they simply just needed to buy because of a growing family and a desire to establish roots. Most underwater homeowners are not speculators and millions of people have lost their jobs in the downturn.
3) What if one doesn’t get the job and has a very poor credit score? A company could open itself up for a potential lawsuit by the applicant claiming discrimination based on credit score, despite the reason being very hard to prove.
DO YOU KNOW WHAT YOUR CREDIT SCORE IS?
The fact of the matter is, more and more employers are checking potential job applicant’s credit scores to determine employability. A credit score is not the main factor, but it is one of many variables which can serve as a tie-breaker among many candidates.
It’s important you check your score once a year. I’ve found a couple errors on my score before which kept my score down by an important 60-80 points! As soon as I cleared the errors, my credit score at the time went up from about 715 to 785. This jump was huge, because at the time 10 years ago, it was went I bought my first rental property. If I didn’t check, I would literally have paid tens of thousands of dollars more in interest over the life of the loan had my erroneous credit score been used.
I found out my average credit score is 798, which is considered “excellent.” However, I’m kind of annoyed why it can’t just be 800. Call me greedy I guess! It doesn’t really matter what your credit score is after about 760, because lenders provide the best interest rates for that score and above. But in order to not really matter, you must first check.
WEALTH BUILDING RECOMMENDATIONS
* Check Your Experian Credit Score Today: For only $1 you can check what your latest Experian credit score is straight from their website. It’s a good idea to see what your credit score is before applying for a loan. If it’s below 720, you won’t get the best rate, but at least you can spend time to improve your score. Furthermore, 1 out of 4 credit reports have errors, negatively affecting one’s credit score. I had a $7 late electric bill that crushed my credit score by 100 points and almost derailed my mortgage refinance. The scary thing is, I had no idea for years! Check your credit score today.
* Protect Your Identity: Sign up with Lifelock and get free identity protection for 30 days and 10% off the monthly membership. Identity theft is America’s fastest growing crime. It’s often undetectable, and by the time you realize your identity is stolen, damage is already done. Thieves can take over financial accounts, file tax refunds in your name, rent or buy properties and even commit crimes in your name. Lifelock monitors trillions of datapoints each day using their proprietary data to keep you safe. Protect your identity for free with Lifelock.
* Manage Your Money In One Place: Sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances. You can use Personal Capital to help monitor illegal use of your credit cards and other accounts with their tracking software. In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.
After you link all your accounts, use their Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. I’ve been using Personal Capital since 2012 and have seen my net worth skyrocket during this time thanks to better money management.
Photo: Mexican Fisherman’s Sunset, SD.