Are Credit Checks a Legitimate Screening Tool?

The use of credit checks has grown over the last several years.  According to a 2010 survey by the Society for Human Resource Management, 60 percent of employers used credit reports for some or all of their background checks.

Employers use credit reports as a screening tool for a number of reasons:

  • They believe it allows them to predict future behavior based on a candidate’s financial history.
  • They are trying to prevent employee theft and assess the applicant’s trustworthiness.
  • They want to reduce legal liability and negligent hiring.

But checking a job applicant’s credit is not without its potential drawbacks:

  • An applicant who has been unemployed for a long period of time may have no choice but to incur inordinate amounts of debt and fall behind in paying bills.  If the candidate has been out of work for months, that doesn’t necessarily mean he should be disqualified for employment.
  • Credit reports fail to provide context.  For example, if debt problems are the result of expensive medical procedures, a low credit score may not indicate anything about future job performance.
  • Credit reports are not perfect.  Ambiguous, dated, inaccurate and/or redundant data create the potential for credit score errors.  While these errors are generally minor, employers should be aware that they exist.
  • Credit reports may not be relevant for the job in question.  Unless the person you’re hiring will have access to sensitive financial information, make financial decisions or handle money, a candidate’s credit report may be of little significance.

Given the potential benefits, as well as the potential drawbacks, are credit checks a legitimate screening tool?  It depends on whom you ask.

According to Christine Walters, a representative for the SHRM during last October’s EEOC public hearing on the practice, effectiveness and impact of credit checks as a screening tool, “SHRM believes there is a compelling public interest in enabling our nation’s employers – whether that employer is in the government or the private sector – to assess the skills, abilities and work habits of potential hires.”

She and other hearing panelists pointed out that the Fair Credit Reporting Act (FCRA) of 1970 restricts employer use of credit reports to employment purposes.  Under the law, the employer must give a job candidate the right to defend himself against (including refuting, explaining or correcting) any collected credit information that might weigh against him.

Chi Chi Wu, staff attorney with the National Consumer Law Center in Boston, expressed a different opinion.  Given the state of the economy, she said that using credit history as a screening tool is “a practice that we believe is harmful and unfair to American workers.  The use of credit history for job applicants is especially absurd when you are looking at an unemployment rate of 10 percent and have many workers looking for a job.”

As an employer, you are within your rights to check a job candidate’s credit.  Before you do so, you should consider:

  • how relevant the information you’re collecting is to the available position;
  • the cost involved versus the benefit to be gained;
  • whether or not your internal staff is trained in how to interpret the complex information contained in today’s credit reports;
  • whether or not there may be potential adverse effects to checking an applicant’s credit.

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