WHAT ARE EMPLOYMENT CREDIT CHECKS?

Job seekers know the headache that can come with looking for employment. But they aren’t the only ones with stress on their plates during the job search and hiring process.

Employers, too, have their work cut out for them. Hiring teams must find incredible candidates with the necessary skills and qualifications who align with the company’s culture and values. In addition, they need to ensure a new hire isn’t a liability to the reputational and financial well-being of the company. That’s a pretty tall order.

Employment credit checks are a vital step in the hiring process to reduce some of that burden and minimize risk.

What Is an Employment Credit Check?

An employment credit check is a standard part of many hiring processes. 

A routine part of candidate screening is that an employer may conduct a credit check just as they may verify employment or criminal history through reference and background checks. Like background checks, a candidate must consent to this screening procedure as part of the onboarding or employment screening process. 

An employment credit check contains historical financial information about a potential employee. The report typically includes info regarding any past claims of bankruptcy, credit usage, and credit inquiries. It can also show whether the applicant has any debt with a collection agency. Contrary to popular belief, the report will not show a potential employer a candidate’s credit score.

Why Would a Company Do a Credit Check for Employment?

So why would an employer want all of this information?

There are myriad reasons a company may opt to conduct a credit check during the hiring process. Those reasons differ based on the type of job and hiring organization.

Take, for example, a job in the financial sector. If a company hires someone directly involved in financial transactions or investments, that company would greatly benefit from knowing if a candidate has a good track record of handling money. You don’t want your next CFO to be in the middle of bankruptcy proceedings. A credit check can help illustrate a complete picture of the applicant’s financial abilities, strengths, and weaknesses.

Additionally, credit checks can help reduce the risk of embezzlement, theft, bribery, and financial fraud in your organization. If a candidate’s report shows a suspicious history of debt issues or consistent late payments, this is a major red flag that that person may not be suitable for the role. 

In a role requiring security clearance, for example, a person with a spotty financial history may be more vulnerable to making poor decisions. Their financial status creates a liability for the hiring organization and a potential security risk.

Generally, a credit check serves as a tool to fully understand a candidate’s background before employment. Like reference checks, it provides a window into an applicant’s past. It can demonstrate if a candidate will be a good steward of company resources and establish trust from the beginning.

How Employment Credit Checks Work

Most employment credit checks follow a pretty standard set of steps. 

Credit checks are often part of the screening after a candidate has received an offer for a job or promotion. As we’ll explain later, some states don’t allow employers to run these checks earlier in the screening process.

The employer will ask for a candidate’s consent to request a credit check. More often than not, third-party companies run these checks. A third-party company, like ScoutLogic, will perform a check and provide a report of any findings to the employer. 

The credit check will include identifying information such as a full name, address, and social security number. It will also include the candidate’s previous addresses and names if any.

Additionally, the report will show outstanding debt, including student loans and credit card debt. It’ll show if a candidate has a car payment, mortgage, and information about late payments and bankruptcies. 

Some information cannot, by law, be in a credit check. Date of birth, for example, is never included to prevent discrimination based on age.

Employment Credit Check Laws

Federal, state, and local laws are in place to protect consumers and prevent discrimination regarding credit checks. 

Fair Credit Reporting Act

The Fair Credit Reporting Act went into effect in the United States on a federal level in October 1970. The purpose of the Fair Credit Reporting Act, or the FCRA, is to ensure that the information in all consumer credit bureau files is accurate, private, and accessed in a fair, ethical manner. Under this law, credit reporting agencies must follow specific guidelines when collecting, utilizing, and distributing consumer report data. 

The FCRA was established primarily to protect consumers by giving them the right to know if and how inquiring parties handle their information. The individual must grant limited access before agencies, such as banks, can access their information. 

The FCRA also gives individuals the right to access their own reports at least once every 12 months. Consumers can request a security freeze on their credit report in case of any unauthorized financial activity.

The FCRA shapes how employers can access, use, and share credit reports and background checks of potential or current employees for hiring and employment. Employers who do not follow FCRA guidelines leave themselves open to lawsuits.

State and Local Laws

While the FCRA is a federally recognized mandate, individual states or even specific counties and cities also have localized statutes and laws. Broadly, these laws are on the books to protect consumers and job applicants from discrimination, bias, and unfair hiring practices. 

One example of a city regulation is the Ban The Box statute that went into effect in Missouri in 2021. Lawmakers designed this statute to reduce hiring discrimination and promotion bias by forbidding employers from running criminal background checks early in the hiring process. Employers must first determine if an applicant is otherwise qualified for the position. Other states, including California, Colorado, and New Mexico, also have Ban The Box laws on the books.

Another law implemented in many states prohibits employers from accessing employees’ or job applicants’ personal social media accounts. An employer may not require applicants to turn over passwords or other login credentials for any personal, password-protected social media accounts. Protected digital information includes emails, text messages, blogs, video services, and more. 

In other states, employers cannot ask an applicant for information on their previous wages or salary history. 

How ScoutLogic Can Assist Your Company

Employment credit checks are an essential part of the hiring process — but so is time management. Simplify your hiring process with ScoutLogic. Our bulk background and credit checks have what you need to get the job done.

David Garcia

David Garcia, co-founder and CEO of Scout Logic, is an industry leader in the bulk background check world. With his strategic acumen and expertise in the HR sphere, specifically in hiring, recruiting, legal compliance, background checks, and resume screening, he’s an invaluable asset and consultant.

David's counsel extends across the boards of ScoutLogic, YipitData, and Supplier.io, drawing from his impactful stints on the boards of Infutor and Avetta. With an extensive 25-year journey, he champions unparalleled B2B commercial leadership within data & analytics, significantly shaping the HR landscape.