Pooja J
Financial responsibility is a critical trait of any employee, but how to assess it during the hiring process? A recent news article highlighted how a bank employee stole nearly $1 million from a customer to fund a side business. This can be alarming, especially for positions that involve access to company finances. In such a scenario, credit checks offer a valuable tool to assess a candidate’s financial responsibility. As an employer, whether you are considering incorporating credit checks into your hiring process or looking to improve your current approach, this article will guide you with everything about pre-employment credit checks.
What is a Credit Check?
A credit check is the process of reviewing a candidate’s credit report to assess their past financial behavior. It offers valuable insights into an applicant’s borrowing history, repayment habits, and past delinquencies, including bankruptcies. Credit checks are particularly important for positions that involve handling a company’s finances, such as accounting.
Additionally, for roles requiring access to sensitive business information or client data, credit checks can act as an added layer of protection against data breaches and financial fraud. However, while conducting credit checks, employers must comply with country-specific laws and regulations governing the collection, storage, and disposal of credit information.
Soft Inquiry Vs. Hard Inquiry in Credit Checks
Soft inquiry: Pre-employment credit checks conducted by employers are typically soft inquiries. These provide a basic risk assessment based on past payment history and potential credit obligations. This information might include public records of bankruptcies or liens, but the details are less comprehensive than those in a hard inquiry. Importantly, soft inquiries have no impact on a candidate’s credit score.
Hard inquiry: Lenders usually conduct hard inquiries when an individual applies for a new loan, credit card, or other credit products. Hard inquiries involve a more thorough credit report examination and can lower an individual’s credit score by a few points. While a single hard inquiry may have a minimal impact, multiple hard inquiries within a short period can have a more significant effect.
What Does Credit Check verify?
Pre-employment credit checks offer valuable insights into candidates’ past financial behavior, particularly how they manage credit and debt. However, it’s important to understand the scope of this information as it relates specifically to financial history and management. Here is a breakdown of what pre-employment credit checks can and cannot verify:
What it can verify:
- Bad debts and past due bills: This includes any accounts that have gone into collections or have been due for a long time, exceeding the payment deadlines.
- Over-extended loans: Credit checks will show if there are any over-extended loans including mortgages, car loans, and personal loans. Over-extended loan typically means an individual has taken loans that exceed their repaying ability.
- Bankruptcies: Any bankruptcy that has occurred in the past seven to 10 years will appear on a candidate’s credit report.
- Open credit accounts: This includes all active credit cards, lines of credit, and other open accounts.
- Outstanding balances on credit cards: The credit check will show details of the current balance on each credit card.
What it can not verify:
- Credit score: Contrary to a popular myth, credit checks reveal a record of a candidate’s credit-to-debt ratio but do not disclose their credit scores.
- Personal information: Personal information like marital status, race, religion, ethnicity, political affiliation, etc is not revealed in credit checks.
- Medical information: Information related to one’s medical bills (even if unpaid) is not revealed in a credit check.
- Most public records: Public records, other than bankruptcies, such as criminal history can not be accessed through credit checks.
Warning Signs to Look for in a Credit Check
When conducting a credit check, certain red flags can indicate potential risks for your organization. Here are some key warning signs to watch for:
High debt levels: Excessive debt particularly unsecured debt like credit cards, might suggest financial instability.
Frequent late payments: A consistent pattern of late payments across multiple accounts can indicate poor financial management and a lack of responsibility.
Bankruptcies and foreclosures: A history of bankruptcies and foreclosures can be a signal of severe financial distress and may impact a candidate’s reliability and decision-making abilities.
Legal judgments: If someone’s finances have deteriorated to the point that a court had to get involved, that may be a sign of reoccurring fiscal irresponsibility. Court judgments related to financial matters, especially those related to fraud or failure to repay debts, can be a red flag.
Multiple credit inquiries: Numerous credit inquiries in a short period can indicate financial trouble or a risk of fraud.
It’s important to remember that credit checks offer a glimpse into an applicant’s financial history, not their definitive financial character. Sometimes, unforeseen events may complicate the finances of even those with a strong financial probity. However, by paying attention to these warning signs, employers can identify the aspects that demand a deeper analysis to ensure that they select candidates who can be trusted for the safe handling of an organization’s finances.
Top Reasons Why Employers Should Conduct Credit Checks
For any organization, a strong correlation exists between how their employees handle finances and the overall integrity of the business. Hiring individuals with a history of financial mismanagement can pose significant risks, potentially damaging an organization’s reputation and brand image. This concern is particularly heightened for leadership positions or roles that have direct involvement in the company’s finances. Here are some top reasons why employers should conduct pre-employment credit checks:
Verification of identity: Credit checks help verify a candidate’s identity by cross-referencing personal information with credit bureau records. This ensures the applicant is who they claim to be, adding a layer of security to the hiring process.
Assessment of financial responsibility: A credit check sheds light on an applicant’s sense of financial responsibility. A history of late payments or defaults on debts can be a red flag, potentially indicating a lack of organization or a tendency towards irresponsible behavior. This information can be particularly relevant when evaluating candidates for positions requiring a high degree of accountability.
Reduced organizational risk: Perhaps the most compelling reason for employers to consider credit checks is to mitigate risk. For positions that involve handling cash, sensitive financial data, or making financial decisions on behalf of the company, employers want to minimize risks like employee fraud or mismanagement. Therefore, a good credit history can indicate lower risk in these areas.
Evaluation of decision making ability: In some cases, a credit report can offer insights into an applicant’s decision making ability. A history of managing multiple credit lines responsibly and maintaining low credit utilization can demonstrate a candidate’s ability to make sound financial decisions. This further reassures the employer about the applicant’s capability of handling similar responsibilities in the new position.
Legal Considerations for Conducting Credit Check
While federal laws like the Fair Credit Reporting Act (FCRA) allow employers to conduct credit checks on potential hires, navigating the legal landscape requires careful attention. Many countries have enacted regulations that dictate when and how credit checks can be utilized in the hiring process. Employers must remain informed about specific laws to ensure compliance. Here are some key legal considerations to keep in mind when conducting credit checks:
Give notice and obtain permission: Employers must first notify the applicant in writing and obtain their explicit written consent. The applicant needs to receive and sign an authorization form allowing the employer to proceed with the credit check. These procedures are governed by the data privacy laws applicable in each respective country.
Compliance with legal standards: Employers must thoroughly research and comply with both federal and state laws that regulate credit checks in employment screening. For instance, the FCRA is a federal law that establishes standards for all types of employment background checks, including credit checks.
Certifying compliance with credit reporting agencies: Credit reporting agencies require employers to certify their compliance with the FCRA and other relevant authorities when requesting credit reports. The employers also need to certify the “permissible purpose” for why they are obtaining such reports. Employers must confirm their adherence to FCRA and other relevant regulations when requesting credit reports. They are also required to specify the permissible purpose for obtaining these reports.
Ensure fair treatment to all employees: Credit checks must be applied consistently and fairly across all applicants for the same position to avoid discriminatory practices. In some states, there are specific laws relating to credit discrimination against employees. (e.g., in New York City, the Stop Credit Discrimination in Employment Act bans most employers from performing credit checks. However, there are several exceptions under this act, including performing credit checks for potential law enforcement officers and executive-level positions carrying fiduciary duties.)
Adverse action notice to employees: If the employer decides not to hire a candidate based on the credit report, they must provide them with a written explanation of such decision and inform them of their right to dispute any inaccuracies on the report. Additionally, the employer may take adverse action only after waiting for a reasonable amount of time so that the recipient has time to review the adverse action notice.
Safe disposal of credit reports: Once a hiring decision is made, the employers must securely dispose of any obtained credit reports following the regulatory guidelines. In the USA, the Federal Trade Commission’s Disposal Rule prescribes specific procedures for disposing of credit information.
Best Practices to Follow While Conducting Credit Check
While credit checks can enhance the hiring process, their effective and legal use requires adherence to best practices. Here are key practices to ensure responsible and compliant use of credit checks:
Adhere to legal requirements: Each country has specific laws governing credit checks (e.g., FCRA in the USA, PDPO in Hong Kong) in employment. In order to avoid legal repercussions, it’s essential to be familiar with and adhere to all relevant clauses of such laws.
Keep information secure: Handle credit information securely to protect against unauthorized access or breaches. Use encrypted transmission methods and secure storage practices.
Provide disclosure: If any adverse action (such as denial of employment) is taken based on the credit report, provide the candidate with due disclosures as per the clauses of FCRA or similar laws. This includes informing them of the specific credit reporting agency used and their rights to dispute inaccuracies.
Handle disputes promptly: If any dispute arises due to inaccuracies found on a credit report, follow the established procedures to investigate and correct them promptly. Also ensure to notify the individual of any changes made.
Ensure transparency with applicants: Inform the job applicants beforehand if credit checks will be a part of the hiring process. This transparency builds trust and allows applicants to prepare accordingly.
Regularly review and update credit check policies: The legal landscape surrounding credit checks can evolve significantly with time. Therefore, periodic review of credit check policies and procedures is a must to ensure they remain compliant with current regulations.
By following these best practices, employers can leverage credit checks as a valuable tool for assessing financial responsibility while protecting themselves from legal risks and ensuring a fair and compliant hiring process.
Frequently Asked Questions (FAQs)
The turnaround time depends on the method of credit check. Electronic credit checks can take as less as a few minutes to a few hours. Whereas manual processes can take longer, typically a few days. Some organizations use third-party service providers, who have their own processing time ranging from a few minutes to a day. Additionally, the complexity of credit checks (e.g., international credit checks) varies from case to case, which affects the turnaround time.
Credit checks are typically required for roles involving the management of company finances and legal responsibilities. These positions often include:
- Accountants and book-keepers
- Financial planners
- Solicitors and lawyers
- Bankers and account managers
- Executive roles
Credit checks typically review an applicant’s financial history over the past seven to ten years. While information about a lawsuit or judgement against an individual can be reported for seven years or until statute of limitations runs out (whichever is longer), information regarding bankruptcies can stay on a report for up to ten years.
Yes, it is possible. However, the accessibility of credit history and information may vary depending on the country’s legal restrictions and the availability of credit reporting agencies.
Yes, it can be affected. If employers find evidence of poor financial management or believe that a candidate’s financial situation could impact job performance, they may choose not to hire the candidate based on these findings.
Yes, certain industries mandate credit checks on their employees, such as:
- Corporate finance
- Law enforcement agencies
- Banking industry
- Financial service providers
- Government and investment firms, etc.
Employers can take steps to secure candidate’s credit information, by adhering to country-specific data privacy laws. This includes limiting access, using data solely for hiring decisions, secure storage, and proper disposal of credit information.
Pre-employment credit checks act as a valuable layer of security during the hiring process, providing some insights into a candidate’s financial responsibility. This can help employers mitigate risks associated with theft, fraud, and financial mismanagement. Credit check not only safeguards an organization’s finances but also protect against potential legal liabilities and reputational damage.
However, navigating the legalities and interpreting credit reports can be complex for employers. Partnering with a reputable background screening service can provide the necessary expertise to identify red flags and ensure compliance. By leveraging their expertise, employers can gain valuable insights into a candidate’s financial history, ultimately making informed hiring decisions that benefit the entire organization.
