A guide to using credit reports for employment screening

It can be difficult to decide which type of background checks are appropriate for your organization. Almost everyone will want to do a criminal background check. What else do you need? In this post we explore a popular supplement, credit reports.

Credit reports are a potentially rich source of information. There are different types available, depending upon whether it is being used for tenant screening (which has some similarity to a loan), or employment screening. The version for employers includes:

• Identifying information about the subject, such as past addresses, aliases, additional social security numbers, and previous employers.
• Details on how they manage their debt — this is the “credit” part. This section shows their credit limits on various accounts and whether they are delinquent or have a history of late payments.
• Public records such as liens, judgments, or bankruptcies that are relevant to a person’s credit.
• A record of who else has requested a credit report on this person for purposes of extending credit. (This section is probably more relevant for tenant screening, as a large number of inquiries may indicate the subject’s desire to take out loans.)

Additional features may be available depending on the credit report provider. Note that employment credit reports do not provide credit scores, that is not considered relevant. Scores are available for tenant screening.

Given this high level of detail, it is understandable that many employers are tempted to use credit reports very widely. However, there are some significant risks in that approach. Everyone would agree that an employee in the accounting department, or one who is expected to handle large amounts of cash, should have a credit check. But running them on every single employee can be intrusive at best, and discriminatory at worst. There have been a number of studies claiming that the increasing use of credit scores in daily life is harmful to minorities.

If you decide to use credit reports as part of your hiring process, you must handle the information you receive very carefully. As with any employment background check, you must obtain written permission from the applicant. You must ensure that the person in your organization who pulls the credit report only does so for that authorized purpose. The right type of credit report needs to be ordered — a pre-employment credit check, not a standard credit check, even if there is a price difference. Violations of any of these rules can cost thousands of dollars per incident. Credit reports should be viewed only by authorized personnel and kept in a secure, locked area. Due to the regulatory burden and questions about fairness, it is common to limit credit report checks to applicants who have access to company finances.

Your credit report provider may have additional requirements. Finally, if you decide not to hire someone based on their credit report, you must follow the rules regarding adverse action.