Ali Gordon | 2 June, 2021

Credit checks are one of the most frequently used screening measures for both housing and employment. The Fair Credit Reporting Act (FCRA) has only existed for about 50 years, and it was created to protect against three primary violations of private consumer information, according to the Federal Trade Commission:

“The FCRA was enacted to (1) prevent the misuse of sensitive consumer information by limiting recipients to those who have a legitimate need for it; (2) improve the accuracy and integrity of consumer reports; and (3) promote the efficiency of the nation’s banking and consumer credit systems.”

Companies that choose to use credit reports as part of their pre-employment process are required to follow specific guidelines outlined by the FCRA. Prospects and hiring teams alike should be able to tell that background checks utilizing credit reports are compliant with FCRA standards. Here are a few ways they can tell.

Compliant Checks Require Written Consent

The FCRA regulates inappropriate use of private consumer information, and, of course, this requires that companies use qualified, verified consumer reporting agencies to run credit checks. It also means companies cannot use or share the data from a report on a candidate for illegal purposes. 

Beyond this, however, a hiring team must provide written documentation in paperwork outside of an employment application and request consent to run the credit report and access credit information. The document must explain that the results of the report may be used in making hiring decisions, and it must be signed by the individual applying for the role. 

Of course, the applicant has a right to deny consent to this part of the process, and, if they do, a company must determine its policies for how to handle this denial. If the role does not have a strong justification for why a credit report must be used, it is possible that the company may still pursue the prospect without the report, but this will need to be decided case by case depending on company values and the position.

Compliant Checks Must Offer an Opportunity to Dispute Errors

If a credit report is used to deny a candidate a role or a promotion, the company still has responsibilities to the candidate.  The FTC says that candidates must be notified in writing, alongside a copy of their report. A Summary of Rights must also be provided.

Mistakes on credit reports are surprisingly common, partly because of data management issues in this part of the financial system. This is important for employers to understand as they shape their hiring processes and determine how much each part of the process will weigh towards the overall qualifications of a candidate under consideration. A best practice is to broaden the employment process beyond credit reports and criminal legal system history: get more information beyond the raw data and red flags. 

If a candidate believes there is a mistake, they are within their rights to dispute this information and correct the mistake. Employers should give applicants an opportunity to do so. They must provide complete contact information for the background check company, state that the screening company was not responsible for the credit report’s impact on a hiring decision, and explain that the candidate has 60 days to correct the report with the agency. Candidates can then request a correction and ask the company to send an updated report to the hiring team. In most cases, the correction should take about 30 days.

Credit Checks Cannot Be Pulled Discriminatorily

The FCRA was passed just after the Civil Rights era in U.S. history, and it was partially intended to prevent discrimination. All parts of a background check must adhere to anti-discrimination policies, and this also means credit checks will not be considered compliant if they are used in any way that prejudices any part of the hiring process against individuals of certain race, gender, faith, or any other protected identities. If employers are going to run or use credit reports on any single candidate in the pool, they must use them for all candidates. The FTC mandates:

“[It is] illegal when the employer has different background requirements depending on your race, national origin, color, sex, religion, disability, genetic information (including family medical history), or age, if you’re 40 or older. It’s also illegal for an employer to reject applicants of one ethnicity with criminal records for a job, but not to reject other applicants with the same criminal records.

 

Even if the employer treats you the same as everyone else, using background information still can be illegal discrimination. For example, employers shouldn’t use a policy or practice that excludes people with certain criminal records if it significantly disadvantages individuals of a particular race, national origin, or another protected characteristic, and doesn’t accurately predict who will be a responsible, reliable, or safe employee. In legal terms, the policy or practice has a “disparate impact” and is not “job related and consistent with business necessity.”

It is always in the best interest of companies to regularly assess their entire hiring and onboarding process for discriminatory practices -- and update the process where needed to meet high ethical and legal standards. There are no shortcuts to holistically implementing fair employment practices...but the hard work of establishing them pays off. 

Compliance and Necessity: Credit Checks Aren't Always Useful

Even if a credit report is completely compliant with the FCRA, requiring one for hiring may be a waste of time for both the company and candidates. Unnecessarily complex pre-screening processes waste money and can even drive away top notch applicants. Employers will often check credit scores to try to gauge a candidate’s ability to manage money, to consider if a candidate will be tempted with theft when working with high value inventory, to attempt to weigh character qualities required for a role, or to vet against fraudulent applications. But a credit report alone cannot offer a clear enough assessment for any of these areas. 

Companies should consider that, although credit scores are utilized for everything from auto insurance to housing to hiring, credit checks may not tell the whole story of a candidate’s qualifications. Even if FCRA compliant, it may not tell a relevant story to the role. Companies should delineate the employment policies around why this report is necessary and for what roles; this is an important reason to use background checks that extend beyond the data to a more humanized process that seeks to understand candidates and role fit more holistically.

For example, women in the United States have only been legally permitted to have a credit card for about 50 years, and because of ongoing gender discrimination in the workplace and otherwise, women still have lower credit scores than men -- despite more responsible financial habits like lower spending and less debt. By only looking at credit history--but not the holistic candidate and context--companies may miss out on talented team members. 

Compliant uses of credit scores taken alone or read narrowly do not accurately reflect a candidates’ qualifications, but they can still be useful in some cases. A more relational, personal approach to background checks is essential to protect against arbitrary interpretations of the data and support the process of determining when they may or may not be beneficial for a company to use. Hiring teams should understand compliance and hiring timelines, broaden their hiring practices, use a qualified background check company, and ensure fair hiring policies throughout each phase of the process to more accurately determine the best fit for each role.

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