What Are Employment Credit Checks?

What is an employment credit check?

An employment credit check is a report an employer receives about a prospective employee. The process of getting the report is similar to applying for a loan. A credit check provides insights from credit bureaus about an employee’s financial history, shedding light on factors like bad debts and bankruptcies.

Running a credit check can glean the following information about a potential employee.

• Bad debt: A credit report shows any debts in collections.
• Past-due bills: Late payments or debts in default are also shown on a credit report.
• Overextended loans: A credit report shows the credit utilization rate, how much available credit is being used.
• Bankruptcies: Any bankruptcy that has occurred in the past seven to 10 years will appear on their credit report.

If you’re hiring employees in sensitive roles (where they’ll have control of the company’s finances) or industries (where they’ll influence the finances of others), you should use an employment credit check to understand the potential new hire’s financial history.

How to run an employment credit check

Many companies will run a background check before hiring a new employee to check their employment history, criminal history, driving record, and more. An employment credit check is a common component of a background check.  

To run an employment credit check, it’s best to choose a background check service with an excellent reputation. While it’s possible to work directly with credit bureaus to check an employee’s credit, it’s a tedious process. Using a service lets you access information more quickly, see results from multiple credit bureaus and uncover potential red flags.

For example, GoodHire is a service that provides standard background checks and employment credit reports, as well as professional license verification, drug screenings, healthcare sanctions checks, and motor vehicle records checks. 

Whether or not you use a service, you’ll need to collect the employee’s personal identifying information, including their name, mailing address, date of birth and Social Security number. You’ll also need to get their consent to obtain a credit report. 

Once you have an employee’s information and consent, relay their information to a credit bureau or background check service that will generate a report for your review.

When should a business run a credit check?

An employment credit check gives employers an idea of a job candidate’s financial responsibility. Knowing a potential employee’s financial history is especially crucial when working in sensitive areas, such as law or accounting, or when they’ll have access to a business’s finances or clients’ money. 

When you should consider running a credit check

Consider running a credit check on a potential employee if their position will involve any of the following:

• Handling money
• Being in a position of trust
• Having access to a business’s or clients’ sensitive information

A credit check reassures employers that the potential employee will act responsibly when it comes to finances. Having a credit check is no guarantee that the employee won’t act irresponsibly, but it at least helps identify potential risks.

Industries where a credit check is advisable

Some industries are particularly sensitive, making it imperative to check employees’ credit. 

• Corporate finance: If an employee will oversee a company’s finances, it’s critical to know whether they have a history of handling money responsibly.
• Law: Lawyers have access to sensitive client information; in some cases, they can even arrange a loan on a client’s behalf.
• Banking: Anyone working in banking has access to extremely sensitive financial information. Employers must know that these individuals won’t handle client data inappropriately.
• Financial services: Similar to banking, financial advisors and related professionals often access clients’ financial data and identifying information. It’s critical for employers to safeguard this information and protect it from employees who might misuse it.

Other situations where credit checks are helpful

A credit check isn’t just a helpful tool for employers. If your business leases space, consider running a credit check on tenants. Or, if your business extends credit or offers long billing cycles, you may want to run a credit check on debtors. 

When a credit check may not be necessary

While it’s a good idea to run a credit check when the position or industry involves sensitive information, it’s not usually necessary in many other circumstances, such as the following.

• Hiring freelancers or contractors: If you’re hiring freelancers or independent contractors who won’t have access to sensitive employer or client information, an employee credit check probably isn’t necessary. 
• Hiring for nonsensitive positions: Similarly, for employees hired into nonsensitive positions, like marketing or design, a credit check may be an unnecessary expense.

What gets reported on a credit check report?

When you run a credit check on an employee, you see everything reported to credit bureaus – and that’s a lot of information. A person’s credit report contains considerable data about their financial history and current finances.

• Credit accounts: A credit report shows all open credit accounts, including loans and credit cards.
• Account balances: A credit report also shows outstanding balances on certain credit accounts, such as credit cards. This information is also reflected as a credit utilization percentage, how much of a person’s available credit is being used. 
• Past-due accounts and late payments: If a person misses a payment or has failed to pay an outstanding debt, that information will also appear on their credit report.
• Bankruptcies: When someone files for bankruptcy protection, that can stay on their credit report for up to 10 years.

Sometimes creditors report incorrect information to credit bureaus or fail to inform the bureaus when an account is closed or updated. If there’s misinformation in a background report, the potential employee can take steps to fix it, and the employer can then run another report.

What are the legalities of employment credit checks?

Since credit is a sensitive issue, federal and state laws regulate credit report access and what employers can do with the information. For example, federal law requires anyone running someone’s credit to get the person’s consent first. 

Additionally, several states have passed laws restricting the use of credit checks in employment decisions. In these cases, employers may be able to run credit checks on current and potential employees, but they can’t use their findings to make hiring decisions.  

Additionally, federal regulation may be on the horizon. In 2020, the U.S. House of Representatives passed legislation that would amend the Fair Credit Reporting Act to restrict employers’ use of credit checks in making hiring decisions. While this legislation has not yet been signed into law, it could seriously impact how and when employers use credit checks to vet employees.

Regardless of how or when you use employee credit information, it’s critical to keep any information you glean confidential. Safely destroy any reports generated, which makes sense because they’re accurate for only about 30 days.