What Employers Need to Know About Credit Checks and the FCRA

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Hiring quality employees is about collecting quality information. Before you can decide whether a candidate is right for your company, you need to know about their experience, their education, and their aspirations; you need to know about their strengths and weaknesses, their motivations, and the kind of person they are.

Most of that information can be learned from applications, resumes, or interviews, but not all of it. Sometimes, you need the insight that comes from understanding how someone manages their own responsibilities — including their finances. That’s why some employers require credit checks before hiring.

However, the use of credit checks should never be taken lightly. Powerful corporations have had to pay millions of dollars in settlements because of their noncompliance with the laws regulating employee credit checks. If you want to include credit checks in your hiring process — and if you already do — here is what you need to know:

Why Employers Conduct Credit Checks

A candidate’s personal financial habits can reveal a lot of information about their personality that you may not have otherwise uncovered. For some employers, checking credit is another way to verify someone’s responsibility and trustworthiness. For other employers, however, the behavioral patterns exposed by a candidate’s credit history are more directly relevant to the role at hand.

For example, someone with multiple late payments on their credit report might be too irresponsible to manage a company’s financial accounts. Many government positions require credit checks because government employees are sometimes in a position to accept bribes. Employees with a significant debt burden could be more susceptible to this financial influence.

What Credit Checks Reveal

When an employer pulls a candidate’s credit report, they won’t see an aggregate credit score. What they will see, however, is a list of the candidate’s current and past debts, as well as records of any late payments or defaults. Like any other credit report, the credit check won’t show any negative marks that have fallen off a report after 7-10 years.

What Is the Fair Credit Reporting Act?

The Fair Credit Reporting Act (FCRA) dictates how companies, landlords, lenders, and others may use an individual’s credit information. It protects consumers from being discriminated against because of information contained within their credit reports, and it also provides guidelines on how employers can request and use credit checks.

First, the company must receive permission from the candidate or employee to perform a credit check. Employers should never authorize a credit check without a signed form on which the candidate has given their direct consent, and this consent form should be separate from the consent forms for other background checks. This gives the candidate a chance to explain anything in their credit report before the employer finds out about it through the credit agency.

Many companies have gotten in trouble by hiding the credit check consent form in a stack of less important paperwork. It should always be clear to a potential employee what the credit check is and what it will reveal.

The candidate has the legal right to decline a credit check. If that happens, the employer is allowed to reject them with no fear of repercussion.

The company also has to prove that it has the right to perform a credit check based on the job description. Some states have laws that supersede the FCRA with more strict regulation on how employer credit checks can be used. For example, California limits employer credit checks to scenarios in which the prospective employee will: have access to $10,000 during a regular workday, personal credit card information, bank information, and/or trade secrets; work in law enforcement or the Department of Justice; or hold a management position. States with similar laws include Colorado, Connecticut, Delaware, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont, and Washington. If you’re not sure about the laws governing your company’s use of credit checks, contact your state labor department to verify.

Once the employer has received results from a credit check, they have to give the potential employee a copy of the report. The candidate has a right to dispute any information on the report, and the company needs to give them an appropriate period of time to do so, often between 3-5 business days.

Companies that conduct credit checks on current employees also need to provide adverse action letters if they discover something on the credit report that is grounds for firing. The employee needs a fair shot to prove their innocence or tell their side of the story.

Bankruptcies do appear on an employee credit check, but the FCRA prohibits employers from discriminating based on that information.

How Employers Can Use Credit-Reporting Agencies

Employers that hire third-party companies, such as credit-reporting agencies (CRAs), to run their background checks still have a legal responsibility to ensure they are abiding by the FCRA or relevant state law. Usually the employer, not the CRA, will be responsible for notifying potential employees, getting their permission beforehand, and sending out adverse action letters.

Businesses that don’t abide by the FCRA can face severe consequences. Companies such as Dollar General, Food Lion, and Chuck E. Cheese have had to pay millions of dollars in court settlements  due to alleged FCRA violations.

James Garvey is CEO of Self Lender.

This article is for informational purposes only and does not constitute legal advice.

By James Garvey