When seeking a new job, applicants often face a background screening process. A common question is whether this screening includes a review of personal credit history. Employers can sometimes access an applicant’s credit report, but this practice is highly regulated and only permitted under specific, legally defined circumstances.
Understanding Background Checks and Credit Reports
A standard employment background check is a comprehensive review of a candidate’s past, typically conducted by a third-party Consumer Reporting Agency (CRA). This process commonly verifies information provided on a resume, such as educational attainment and previous employment dates. It also usually includes a review of public records for any relevant criminal history. The information gathered helps an employer confirm the accuracy of credentials and assess general trustworthiness.
A credit report is a detailed summary of an individual’s financial behavior over a period of up to seven to ten years. This document tracks how a person manages debt, including the timely payment of loans and credit card accounts. It records the types of credit used, the total amount of debt owed, and the status of various accounts. This summary is used to gauge an individual’s reliability in handling financial obligations.
When Credit Reports Are Used in Background Checks
Employers generally reserve the use of credit reports for positions involving a high degree of financial trust or fiduciary responsibility. This practice is based on the premise that an applicant’s financial history may reflect their suitability for handling company assets. Roles such as corporate treasurers, controllers, or senior accounting staff are frequently subjected to this review before an offer is finalized.
Positions that grant access to large sums of company money or highly sensitive financial data also necessitate a credit check. Examples include individuals working in banking, investment firms, or high-level executive positions. Roles requiring a government security clearance also mandate a comprehensive financial review as part of the screening process.
The rationale behind these checks is mitigating the risk of employee theft or fraud, particularly when an individual is under severe financial strain. Employers may view a history of significant debt or poor payment habits as a potential indicator of future risk. The frequency of credit checks is highest in the financial services industry, where regulatory compliance often makes them standard procedure.
The Requirement for Applicant Consent
Accessing an applicant’s credit information for employment purposes is governed by the federal Fair Credit Reporting Act (FCRA). The FCRA mandates that an employer must first notify the applicant in writing of their intent to obtain a consumer report, which includes a credit check. This notification must be presented in a clear, stand-alone document consisting solely of the disclosure. It cannot be buried within a larger employment application or other forms.
The employer must then obtain the applicant’s explicit written authorization before contacting a Consumer Reporting Agency (CRA) to run the report. This ensures applicants are fully aware their financial history will be reviewed as part of the hiring process. Without this signed consent form, the employer is legally prohibited from proceeding with the credit portion of the background screen.
The consent allows the employer to access the report but does not waive the individual’s rights under the FCRA to dispute any inaccurate information. The employer must also certify to the CRA that they are complying with all FCRA requirements, including obtaining authorization and ensuring a proper permissible purpose exists. This two-step process of disclosure and authorization protects the financial privacy of the job seeker.
Separate authorization is required if the employer intends to conduct ongoing checks throughout employment, such as for annual security reviews. While some employers attempt to use a single blanket consent form, the FCRA requires the disclosure regarding the credit report to be clear and conspicuous. Failure to adhere to these procedural requirements can expose the employer to significant legal penalties.
What Employment Credit Checks Reveal
The credit reports utilized for employment screening are tailored versions that differ substantially from reports used for mortgages or car loans. These employment-specific reports intentionally exclude the applicant’s actual credit score, such as a FICO score, which is irrelevant to assessing employment risk. The primary focus remains on the historical management of financial obligations rather than a numerical rating.
The core information revealed includes payment history on various types of credit accounts, such as installment loans and revolving credit lines. Employers will see details regarding late payments, accounts sent to collection agencies, and the outstanding balances of debts at the time of the report. This data helps the employer assess patterns of financial distress or consistent fiscal irresponsibility.
Public record information is a prominent part of the employment credit report, detailing any bankruptcies, foreclosures, or tax liens filed against the applicant. The FCRA mandates the redaction of several pieces of personal information to prevent discrimination. Information typically excluded includes the applicant’s age, marital status, and specific account numbers, which are unnecessary for evaluating financial risk.
Negative information, such as late payments or collection accounts, generally remains on a credit report for seven years, while bankruptcies can remain for ten years. The employment report provides a snapshot of this history, allowing the employer to see if financial challenges are recent or historical issues that have been resolved. It is designed to be a tool for risk assessment.
The Adverse Action Process
If an employer receives a credit report and decides to take an action that negatively impacts the applicant, such as denying a job offer, the FCRA mandates a specific two-step Adverse Action process. This process is triggered even if the credit report was only one factor in the hiring decision. The goal is to provide the applicant an opportunity to review the report and dispute any inaccuracies before the final decision is made.
The first step is the Pre-Adverse Action Notice, which must be delivered to the applicant before any final decision is communicated. This notice must include a copy of the specific credit report reviewed by the employer. It must also include a copy of “A Summary of Your Rights Under the FCRA,” which outlines the applicant’s entitlement to dispute any information on the report with the reporting agency.
The employer is legally required to provide a reasonable amount of time for the applicant to review the documents and potentially contact the Consumer Reporting Agency to initiate a dispute. While the FCRA does not specify an exact number of days, the Federal Trade Commission recommends allowing at least five business days between the delivery of the pre-adverse notice and the final action. This waiting period allows for correction and rebuttal.
If the employer decides to move forward with the negative decision after the waiting period, they must issue the Final Adverse Action Notice. This second notice formally informs the applicant of the decision, such as the denial of employment or promotion. It must include the name, address, and phone number of the CRA that provided the report. It must also state that the CRA did not make the hiring decision and cannot explain why the action was taken.
The final notice must also inform the applicant of their right to obtain a free copy of the report from the CRA if requested within 60 days. It must restate the applicant’s right to dispute the accuracy or completeness of any information directly with the Consumer Reporting Agency. Adherence to this two-part notification protocol is mandatory for all employers using credit reports to make employment decisions.
State Laws Limiting Credit Report Usage
While the FCRA establishes the federal baseline for using credit reports in employment, many state legislatures have enacted laws that place greater restrictions on this practice. These state laws often prohibit employers from using credit history for general employment decisions, especially for roles that do not involve direct access to money or financial oversight. These restrictions aim to prevent employers from penalizing applicants for past financial difficulties unrelated to job performance.
States like California, Illinois, and New York have comprehensive restrictions, limiting credit checks to roles where the law specifically requires it or where the job involves high-level security or fiduciary duties. For example, in New York City, employers are largely banned from requesting or using credit history for most hiring, promotion, or termination decisions. These local laws supersede the federal FCRA when they offer greater protection.
Other jurisdictions, including Washington, Oregon, and Hawaii, have adopted similar measures, creating a patchwork of regulations across the country. Employers operating in multiple states must ensure compliance not only with federal law but also with the specific requirements of each locality. This complexity means a credit check permissible in one state may be illegal in a neighboring one.