Credit Check for Employment: Complete Guide for Small Businesses

A credit check for employment is a type of pre-employment background screening that specifically looks at a candidate’s financial and credit history. Most companies don’t run credit checks on every new hire, typically reserving that for candidates applying for a position that deals with money.

Much like a background check, you’re looking for information that would disqualify a candidate for employment. You are not required to run pre-employment credit checks, but if you do, there are standards you must follow such as giving the candidate the right to dispute negative results.

How Pre-employment Credit Checks Work

To run a pre-employment credit check, you can use a credit check company. If you’re already working with a background check company, it’s a good idea to inquire whether it can add on a financial background screen for a small charge. This saves you time and money and gives you all of the background check information in one place.

The general process is as follows:

1. Have the candidate sign a Fair Credit Reporting Act (FCRA) credit check authorization form
2. Run the pre-employment credit check
3. If the results meet your satisfaction, extend a formal offer to the candidate
4. If the results do not meet your satisfaction, provide an adverse action notice to the candidate stating there were negative results on the credit check; include a copy of the results and the FCRA summary of rights
5. Wait a week to hear back from the candidate
6. If there is no response or you find explanations to be insufficient, reject the candidate and provide them a final notice of adverse action; include the name of the credit check agency, contact information, and additional FCRA rights

Some cities and states forbid the use of pre-employment credit checks or restrict how and when companies can use them. Before you run a credit check on an applicant, make sure your state and local laws allow you to do so and get the candidate’s permission in advance, just as you would with a criminal background check.

There is no federal law, however, requiring employers to run credit checks. If you choose to do so, there are FCRA standards you need to follow such as those mentioned above (allowing the candidate to view the report and verify its accuracy, receive notification of adverse action, dispute the report and have it corrected, etc.)

Results From an Employment Credit Check

You don’t get a copy of the candidate’s full credit report, instead receiving a modified and scaled-down version. The results show you the candidate’s payment history, the amount they owe, and their available credit. You’ll also see a limited history.

Negative information on a credit check can include many types of financial details. Whether the details rise to the level of concern where you should deny employment is a different matter and one unique to your company.

Here’s what you may see on the credit check:

• Frequent late payments
• Lots of revolving credit
• Low credit availability
• Excessive bad debt (credit cards beyond 60 days past due)
• Bankruptcies
• Tax liens
• Civil judgments
• Foreclosures

What you won’t see are the candidate’s credit score, account numbers, birth year, and marital status. This will put them at ease about what you see and shield your company from liability if you choose to not hire them. No information older than seven years will appear on the credit check results, either, unless the candidate has a bankruptcy, which will appear for up to 10 years after they filed.

What to Do With Negative Credit Check Results

As mentioned above, you have to inform the candidate if you aren’t hiring them because of negative results and include a copy of the results and the FCRA summary of rights.

Be careful when using credit check results to deny employment. The Equal Employment Opportunity Commission (EEOC) prohibits employers from discriminating against potential employees when using credit check results to make employment decisions.

This means that a company cannot use one standard for female candidates and another for male candidates. To comply with the EEOC, any employment decisions you make based on credit check results must be consistent regardless of the individual candidate.

Hiring Candidates With Negative Credit Check Results

Hiring employees is a time-consuming process. You may get through the interview process and fall in love with a candidate. If their credit check comes back with some negative marks, do you really want to start the hiring process all over? That depends on many factors, including the position and the information contained in the candidate’s credit report.

If you’re hiring a chief financial officer, for example, and they recently filed bankruptcy and have several past due accounts in their credit history, that might warrant removing the candidate from consideration. This type of position will not only have access to your company’s detailed financial records but also to client records and employee records. The high-level nature of this position requires a great deal of trust and confidence. If the individual is unable to manage their own finances, they may have difficulty providing your company with sound advice.

If a credit check returns the same results, but this time the position is for a financial assistant, it may not be as bad. The individual may still have access to confidential information but their position is not as high-level, so you may be able to better restrict their access, protecting client and company security.

Ultimately, it’s up to you to determine your company’s threshold for risk. If a candidate has several negative marks, that may be enough for you to reconsider their employment. If the negative marks are older and they’ve shown great credit history recently, maybe they’ve changed and improved their habits.

Why You Should Run Credit Checks

While it may not be the best way to determine whether a candidate is responsible and capable of doing a job, running a credit check can shed light on whether they could be a risk to your organization. Some people in tough financial situations resort to taking drastic measures, including embezzlement.

Common Positions Requiring a Credit Check

In 2020, the Professional Background Screening Association reported that 14% of employers ran a pre-employment credit check on all job candidates—and nearly 40% did so just for positions involving access to sensitive financial information. Companies running credit checks across the board are usually banks or other financial institutions. This presents an added cost to hiring, but these companies have also determined that uncovering potentially risky hires is worth that cost.

Apart from bank employees, the positions you might want to run a credit check on include:

• Bookkeeper
• Accountant
• Retail clerk
• Retail store manager
• Payroll clerk
• Financial analyst
• Any other position where a worker may use cash or have access to financial information

Besides using a credit check for jobs that touch money, companies may also run a credit check for positions that deal with sensitive and classified information. A credit check can help verify a person’s identity and provide your company with a level of security, knowing that the individual is trustworthy and not in dire financial hardship.

Bottom Line

Running a pre-employment credit check on potential new hires can add a layer of time and expense to your hiring process. However, for positions requiring trust and confidentiality of financial information, it may be worth it to protect your company, your other employees, and your clients.