Basics of credit reports and background checks

There is a great deal of misinformation on the internet about credit reports and job hunting.  It is important to keep in mind that employers are not trying to find ways to eliminate people from jobs. A background check including a credit report is only run AFTER an employer has gone through the time, cost and effort to find the right candidate.  An employer does not invest money in a background report just to find ways not to hire. When an employer initiates a background check, it is because they are interested in hiring the applicant and are conducting due diligence to make sure there is no reason not to hire. Under the federal Fair Credit Reporting Act (FCRA), a credit report is only obtained after the applicant has given consent and after a legally required disclosure on a standalone document has been given.  If the employer utilizes the credit report in any way not to hire, an applicant is entitled to a copy of their credit report, a pre- adverse action notice as well as a statement of their rights. Before any decision becomes final, the applicant also has the right to challenge the credit report before any denial of employment is made final.

To summarize briefly, Employment Screening Resources advises employers to approach credit reports with caution when it comes to background checking, and to articulate a clear rationale as to why a credit report is related to a particular job.  Employers should also be aware that there is the potential for errors in credit reports.  A debt may be reported incorrectly for various reasons. The applicant could also be the victim of identify theft which can also lead to incorrect data. 

Also, negative entries may well not be a valid predictor of job performance.  For example if there is an illness in the family and credit cards are used to pay medical bills, or there has been a long period of unemployment,  a consumer’s credit report may show a large outstanding debt that may not affect suitability for employment.  In fact, an overly board use of credit reports could lead to claims of discrimination if there is a disparate impact on protected groups.

On the other hand, hiring a person that handles money or assets, makes fiduciary decisions, or has access to other people’s private data without running a credit reports could result in allegations of negligent hiring if a theft occurs and a credit report as part of a background check would have lead to relevant information. Embezzlement, internal theft and identity theft are significant problems in the U.S.

One thing to keep in mind: it is an urban myth that employers receive a credit score. Employment credit reports simply do not contain a credit score since there is no evidence of a connection between a credit score and employment.  An employment credit reort is much different than a credit report used for lending. Anyone that says employers are using credit scores just does not know what they are talking about. On the other hand, employment credit reports do contain a credit history, which will tell an employer if an applicant pays on time, or has such a large monthly debt that it raises a red flag if a person is to be put in charge of cash or assets or placed in a fiduciary position. In addition, there are limitations on using a bankruptcy for employment, since a person that goes through bankruptcy is entitled to a “fresh start.”  For more information, see:  https://www.esrcheck.com/articles/Credit-Reports-and-Job-Hunting.php

Two states, Hawaii and Washington, have passed laws regulating the use of credit reports for employment and more states are apparently looking at similar rules.

Another aspect of the use of credit reports are the vastly increased regulations imposed by the credit bureaus on background screening firms and employers, in order to protect privacy and counter identity theft. Legitimate screening firms that are in compliance with the contractual obligations set forth by the credit bureaus are required to essentially do a background check on employers that want credit reports.  This can include on-site inspections by third party agencies of the employer’s premise, as well as checking bank and trade references and other steps to ensure the employer is legitimate, has a permissible purpose and meets the guidelines set out by the credit bureaus.  Certain businesses, such as home based operations, or businesses that share space with prohibited users cannot qualify for credit reports. In addition, the new ‘Red Flag’ rules require employers to have a written policy and procedure in place to deal with address discrepancies.  See: http://ftc.gov/os/fedreg/2007/november/071109redflags.pdf

Although ESR assists employers in navigating the process and supplies a sample Red Flag policy, small and medium businesses (SMB) often find that requesting a credit report adds a significant layer of complexity to the process. Other searches typically done as part of a background check, such as criminal records, do not carry these added complications. Many SMB avoid these headaches by simply requesting that an applicant obtain their own credit report and present it to the employer.  This is easily done since every consumer by federal law is entitled to one free copy of their credit report from each of the three major credit bureaus yearly from https://www.annualcreditreport.com/ However, employers must still use caution to ensure that the use of credit reports is fair and non-discriminatory.