When to Run a Credit Check on a Prospective Hire

Filed under Hiring Workers. Fact checked on May 24, 2012.

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Checking the credit history of job applicants is recommended if the job involves finances. Otherwise, strict federal restrictions on credit report checks means doing them can be more trouble than they're worth.

Background checks are an important part of the hiring process and checking an applicant's credit history is one type of background check that an employer may decide to utilize. Checking an applicant's credit history may be advisable or even required by law if as part of the responsibilities of the position a prospective employee will be handling large sums of money or exercising financial discretion. However, the restrictions placed on credit checks balanced with the information they yield makes their use limited for employers in general.

What information will you obtain if you obtain a credit history check on a job applicant? A credit report will include the following information about the applicant:

  • address
  • Social Security number
  • bankruptcies
  • tax liens
  • judgments
  • child support obligations
  • loans
  • the names of other employers who have checked the applicant's credit

What information is not part of a credit report? Credit reports do not provide information on:

  • previous income
  • college background
  • bank accounts
  • personal investments
  • criminal history
  • medical history

There are a number of things to consider if you decide to run a credit history check:

  • It will cost you. You will have to pay the credit agency for the credit report. The fee may vary.
  • Federal law on credit reports. There is federal legislation that governs the use and disclosure of credit information. You must follow the law if you're going to run a credit check.
  • State laws on credit checks. A number of states currently have laws on the books that require employers to provide notice and/or copies of credit checks whenever they're used for employment-related decisions.
Warning

Several states have passed laws prohibiting the use of credit history for employment decisions, including hiring, except in limited circumstances.

  • Anti-discrimination laws may apply: You may run afoul of anti-discrimination laws if you can't show a business reason for the credit check if screening on that basis has a disproportionate impact on minorities.

Federal Laws for Credit Checks

The Fair Credit Reporting Act of 1971 regulates the use of consumer credit reports as a part of background checks on applicants.

Hiring is a permissible purpose to do a credit check under the law, but you must keep the results confidential and must not put the results of the check in the person's personnel file.

If the credit report shows that the person declared bankruptcy, then you also have to comply with provisions of the federal Bankruptcy Act.

Under the Bankruptcy Act, you may not discriminate against an applicant solely because a credit check reveals that an applicant has sought protection under the Bankruptcy Act, been insolvent before seeking protection under the Act, and not paid a debt that can be discharged under the Act. In other words, bankruptcy is not a valid reason to deny employment.

Under federal law, you must make the following disclosures when running a credit check on an applicant:

  • Clearly and accurately tell the applicant that an investigative consumer credit report may be made that could include information on the individual's character, reputation, personal characteristics, or mode of living.
  • Make the disclosure in writing, separately (not as part of your job application). Your credit reporting agency can provide you with forms to be used for this purpose.
  • Mail or otherwise deliver the notice to the individual not later than three days after the date on which the report was requested.
  • Include with the disclosure a statement informing the applicant of his or her rights to request disclosure of the nature and scope of the investigation required.
  • Have the applicant sign the disclosure document and return it to you. Be sure to keep this in your files.
  • If requested by the individual, make a complete and accurate disclosure of the nature and scope of the information sought not later than five days after the date on which the individual made the request, or five days after the investigative report was requested, whichever is later.
Tools to Use

A sample Fair Credit Disclosure Act notice is included in the Business Tools.

If you do deny employment because of something on the credit report (and remember, it must be something other than bankruptcy), you must:

  • Inform the job applicant that employment was denied because of the credit report investigation, even if the credit report wasn't the only reason.
  • Furnish the individual with a copy of the credit report, along with a summary of the individual's credit rights.
Warning

The Federal Trade Commission is very specific regarding the format of the consumer credit rights notice that must be provided to an employee or applicant if adverse action is contemplated. Fortunately, federal law requires credit reporting agencies to provide a copy of this notice with each credit report. You can use this notice to fulfill your own notification responsibilities.

The Fair and Accurate Credit Transactions Act requires employers to destroy all papers or electronic files or media containing personal information derived from a consumer report before it is discarded.

State Laws for Credit Checks

A number of states regulate the use of credit checks for job applicants. However, the current federal law provides such strict requirements that in most cases it will provide more protection for employees than the state laws do. Therefore, if you follow the federal rules, you'll generally be in compliance with your state law as well.

That being said, this area of law continues to be one of much activity on the state level. Be sure to check your state's law and/or consult with your attorney to make sure you are in compliance with the current state law concerning the use of credit checks for job applicants.

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