What You Need to Know about Pre-Employment Credit Checks

What You Need to Know about Pre-Employment Credit Checks

Employers in today’s highly competitive job market are often inundated with unsuitable applicants each time they post a new open position. After HR teams filter out less qualified applicants, they must choose the best candidate from the remaining pool. Deciding who should receive a job offer is a difficult proposition in the best of circumstances. However, when candidates who possess nearly identical skill sets and experience levels are vying for a single position, some employers resort to checking consumer credit files to help in the decision-making process.

In general, pre-employment credit checks are unpopular among most companies. This is partly due to the fact that there are a growing number of states that have restricted or outlawed applicant credit checks. According to a 2016 CareerBuilder survey, only 29 percent of companies currently perform pre-employment credit checks.

There are several viewpoints about the fairness of pre-employment credit checks. Critics of pre-employment credit checks assert that evidence linking job performance to financial status is anecdotal at best. However, proponents of pre-employment background checks insist that credit reports reveal vital information about an applicant beyond how well he or she handles his or her debts. In fact, many believe that people with poor credit histories are less trustworthy, less reliable, and do not perform as well on the job.

In this article, we’ll explore the most common justifications for pre-employment credit checks as well as what human resources professionals should be aware of when considering implementing applicant credit checks.

Consider the Nature of the Position

While it’s true that some employers utilize pre-employment credit checks for all prospective new hires, others use them solely for candidates applying for specific types of positions. For example, it is standard procedure for many firms to perform a comprehensive background investigation, which often includes research into the person’s financial history, on applicants applying for a C-Level position. This is because executive positions often put employees in direct contact with sensitive information, and some employers rationalize that if a person has demonstrated carelessness with his or her own financial affairs, then that person will not be very meticulous with other people’s financial data. Other positions that are more prone to pre-employment credit checks include jobs in which people work with cash or have access to financial systems or private-asset information.

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Credit checks are a touchy subject for applicants and human resources departments alike. If a company is considering implementing credit checks, then it should decide which jobs within the firm will require them as part of the hiring process. If a position is not related to finances and there’s no high level of security involved, then it might be wise to forego a pre-employment credit check.

Be Mindful of the Applicant’s Rights

Before an employer can legally perform a pre-employment credit check, it must obtain signed permission from the applicant to do so on a single document that clearly explains that the company is requesting a copy of the applicant’s consumer credit report. This document must also detail how the company will use any information it obtains from the report.

The Fair Credit Reporting Act (FCRA) protects an individual’s credit report several ways. For example, each time an applicant authorizes an entity to run a credit check, that person is entitled to a copy of his or her report. In the event that the company denies employment to an applicant as a result of the information contained in his or her credit file, the hiring firm must clearly explain the reason(s) why in an FCRA document entitled, “A Summary of Your Rights Under the Fair Credit Reporting Act.” Additionally, the employer must supply the applicant with the name of the credit reporting agency and instructions showing how to dispute erroneous information contained in the credit report.

In addition to FCRA requirements, employers must be aware of their state’s policy on pre-employment background checks. Some states have explicitly stated that companies can only use credit checks for certain position classifications, while several others have outlawed the practice of checking an applicant’s credit altogether because the practice was viewed as a way to discriminate against otherwise qualified candidates. According to Milan P. Yager, CEO and president of the National Association of Professional Employer Organizations, less-than-perfect credit alone is usually not a good reason to not hire a person for a job they are otherwise qualified for.

While pre-employment credit checks may indeed be a necessary tool for screening applicants for financial positions or those requiring a top-level security clearance, HR professionals may wish to evaluate the necessity of these checks for other jobs. Employers must work to maintain the delicate balance between thoroughly vetting their candidates and relying on overly intrusive and often irrelevant data gathering.

Many companies, lobbyists, and consumers have taken action in order to end across-the-board credit checks, though not much has happened at the upper levels of government. Some firms realize that there are plenty of qualified candidates who have credit issues and that running these checks can be an expensive waste of time. If your company is considering implementing pre-employment credit checks, it’s imperative to understand that credit checks often don’t tell the whole story.

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