Understanding the Role of Employment Credit Checks

Protecting your business from fraud is fundamentally important. Not all sources of risk originate outside the business, though. In many cases, internal threats are the greater problem. Every year, companies lose millions of dollars to white-collar crime. Identifying who might be a risk factor is no easy feat—there’s no way to predict the future. However, you can control your risks in much the same way you do with criminal employee background checks. Employment credit checks can be a valuable tool in high-risk situations.

There are limitations to these tools, and there are things to keep in mind when evaluating them. You may not legally be able to use credit checks for hiring in some states or job roles. Here, we’ll look at the role these tools have to play in a smart, sound hiring process. First, let’s consider what helpful information you may find and when employers choose these products to make employment decisions.

Who Should Undergo a Credit Check?

Ordering a credit report for every applicant is time-consuming and can be expensive. That’s not to mention it may not even be allowed in your state. Potential employers typically limit consideration of credit reports to job roles that include a higher level of responsibility, such as management. Roles involving financial processes or cash access within the business are also high risk. Using a credit report can reveal situations that may make someone more likely to commit financial crimes.

Jobs that usually undergo a credit check may include:

• Management
• Bank-related roles, such as bank tellers or loan officers
• Roles that require credit checks by law
• Financial jobs, including accounting or payroll
• Jobs that involve direct physical access to cash

The average fast food worker preparing meals doesn’t have a significant degree of fiscal responsibility. A credit history for such employees is less likely to be relevant. However, the risk is much higher for someone with access to company accounts. That can make checks more valuable. As part of a commitment to responsible employment, a credit check could be critical in some cases.

What Can You Learn From a Credit Check for Employment? 

Understanding red flags on a credit report is critical. If you find too much negative information, you might consider an applicant to “fail” their credit report. That usually means you won’t proceed with hiring them. So, what might appear as a cause for concern? Remember that the Fair Credit Reporting Act restricts certain information older than seven years for jobs paying $75,000 or less.

Some typical information you might see, if present, includes:

• Credit score
• Legal judgments against someone
• Liens
• Open credit accounts and utilization rates or balance amounts
• Bankruptcy declarations
• Negative credit data, such as missed payments, cards over the limit, etc.

Evaluate this information with care and in the context of the job role. A few missed payments may not be a cause for concern. Someone with a very high debt load and frequent missed payments, however, could be a more considerable risk for financial crime.

Build Your Hiring Process on Firm Legal Footing

Before you order credit checks, ensure you’re allowed to do so in your state. Credit reports are a very regulated consumer reporting product. Financial Sector Conduct Authority (FCRA) compliance is only the tip of the iceberg. There may be state rules you must also follow. Some areas have outlawed or restricted the use of credit checks for employment to promote fair hiring decisions.

Currently, ten states have explicit restrictions on credit checks:

• California
• Colorado
• Connecticut
• Hawaii
• Illinois
• Maryland
• Nevada
• Oregon
• Vermont
• Washington

The specifics of the rules vary by state. Some establish broad criteria for when credit checks are acceptable. For example, someone who handles more than $10,000 in cash in California can undergo a credit check for employment. Businesses in these states should carefully review their obligations. Employers elsewhere should continue to monitor for changes in the law. Some major cities, including New York City and Philadelphia, have similar laws.

A Basic Guide to Using Credit Reports Legally 

Use this quick overview to understand the process for ordering credit reports.

1. Verify that you have a legally permissible purpose for ordering a credit report. Confirm that it is legal to use credit reports in a jurisdiction. If there are restrictions, you must limit ordering reports to only those allowed under the law.

2. Provide a Fair Credit Reporting Act standalone disclosure to the applicant. It must be separate from all application materials and not a part of a packet of unrelated information.

3. Obtain the applicant’s written consent to allow you to order a background check.

4. Work with a trusted reporting agency, such as backgroundchecks.com, when running a credit check.

5. Receive and review your report. Determine what action you may take.

6. If the applicant failed the report due to too many red flags, issue a pre-adverse action warning. Inform the applicant you intend to take action based on the report.

7. Wait for the applicant to respond, usually five business days.

8. If the applicant does not respond and dispute the findings, issue a final notice of adverse action and close the application process.

Consider All Possible Sources of Financial Crime

The law should be your first guide when determining which applicants should undergo credit checks. Beyond that, you should consider which employees represent the most potential for risk. For example, if you only screen full-time hires, you might risk a part-timer spotting the opportunity to steal. Outside workers could be risks, too. Contractors and vendors providing services may need to access your business systems. Choose to work with companies demonstrating a rigorous, compliant vetting process.

The rise of remote work creates new challenges, too. Members of crucial teams may no longer work in the office—even the accounts payable or receivable clerks. Don’t adopt an “out of sight, out of mind” approach. Remote workers with the right level of access have an even greater opportunity to commit fraud. When allowed by law, you should apply credit checks to these positions when relevant.

Combine screening with strong internal controls, transaction reviews, and other anti-fraud measures to protect your business best.

Credit Checks Don’t Always Tell the Whole Story

Evaluate credit reports in context. Remember that the numbers you see don’t tell you all the details. For example, consider encountering an applicant with a high debt load. Perhaps they have had a bankruptcy in the past. Avoid using red flags as automatic disqualifiers. Instead, for otherwise qualified applicants, they could be the basis for a discussion in an interview. You may learn there is more to the debt than simply irresponsibility.

Many Americans today have some level of debt. Life events can further complicate someone’s report. A health scare could lead to lost income and higher debt. A recession may mean layoffs and the need to rely on credit to get by. Remember to view credit checks as just one piece of the puzzle. Dig deeper when necessary to learn how best to use credit information.

Reliable Screening Tools 

Protect your business and reduce the risk of fraud and financial crime. Employment credit checks play a vital role, but you must know how to use them appropriately. Build a legally sound procedure and define which job roles require a credit check. When you’re ready, take the next steps to find the necessary information. With support from backgroundchecks.com, you can order both background and credit check reports easily. Get started today, or learn more about vetting in our Resource Center.