Credit Checks: Yes or No?

by Michael Haberman on October 21, 2010 · 0 comments


As reported by the Wall Street Journal and by SHRM the EEOC has been holding hearings whether the use of credit checks on potential employees should be utilized by a company in making a hiring decision. Representatives from SHRM (tesitmony can be found here), the US Chamber of Commerce, the law firm of SeyfarthShaw, LLP, and others testified on behalf of continuing the practice of using credit checks. Advocates for low income individuals testified against their use. The major point appears to be that poor credit potentially could be a bar to gaining employment in these tougher economic times. I have had some clients and students inquire about the use of credit checks as well. So I thought I would weigh in on the subject for my readers.

Credit checks usage as a background check, and indeed all background checks, are treated the same as consumer credit checks and are governed by the Fair Credit Reporting Act. The FCRA requires that you have an applicants permission to check their background. It also requires that if you make some adverse determination on the basis of that background check that you inform them, give them an opportunity to respond and to potentially correct the information if it is indeed incorrect. You can find the entire FCRA here. (Note it is an 86-page document.) The law does hold a company to the standard of insuring that their practices do not result in disparate impact, recognizing that minorities have historically have poorer credit records than do non-minorities, in some cases due to discrimination.

So the major complaint about the use of credit history as a hiring tool is that some companies use it across the board for all applicants as an indicator of “character” and “personal responsibililty.” They deem this as “fitness for the job.” In my opinion this is a poor decision making process and a misuse of the law. Character and personal responsibility are better left to the interview. Using the credit report is the lazy way out. Of course if they screw this up, they may be conducting illegal interviews as well.

What is the proper use of the credit check as a decision making tool? Determining if the position requires the employee to handle company money, company credit, customer money or customer credit, such as access to credit cards. Putting people in these positions without a credit check could expose the company to liability, either due to internal theft or to theft of consumer information. Let me give an example. I once ran across a company that would do a credit check on an employee on a whim. Poor decision making. Unfortunately for them, the one person they did not credit check was the person they hired to be their accountant. She had a good resume and she interviewed very well. She came across as trustworthy. So imagine their surprise when auditors discovered that she had embezzled over $60,000. If they had check her credit they would have discovered that she was $120,000 in debt. That might not have altered their decision to hire her, after all she was a good accountant. But it might have put them on alert to more closely manage her work. Either way money, time, effort, and heartache might have been prevented.

So my answer to the question in the title is YES. I would use, and have used, credit checks in making determinations on candidates for positions in which the future employee would be exposed to things that might damage my company or a client of the company. If you are running a piece of machinery, interviewing candidates, emptying the trash, filing reports, sewing clothes, cleaning the carpet I don’t care what your credit history has been. I just require that you come to work and do a good job. If your credit history gets your car repossed then it might become an issue, but only if you can no longer get to work.

Will companies continue to use the credit check incorrectly? I am pretty sure the answer to that is YES. These are probably also the same companies that violate the FLSA, the Civil Rights Act, FMLA, the ADA and most of the other laws. Does that mean all of those have to be changed? Nope. Just need to penalize companies that violate them.

There is no one-to-one connection between your character and your credit… not today anyway.

So what do you do? Are you a YES or a NO?

You can find a differing opinion from Lance Haun here.

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{ 3 comments… read them below or add one }

Lance October 21, 2010 at 1:53 pm

Thanks Mike for the shout out. I definitely think credit reports can be used responsibly in certain instances. When SHRM research indicates that 13% of companies do across the board credit checks, that's 13% too much. I feel that some sort of protection and guidance from the feds makes sense (before a checkerboard of state laws takes hold and impacts our ability to put together intelligent screening processes).

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Lauren October 21, 2010 at 6:14 pm

Hello Mike and thank you for writing the article which really makes me think about the credit check question.

I have seen comments about the that they have done a credit check on a potential employee and found out that they had embezzled money before. Okay, that's a good point, but how many candidates have they found that to be true? I don't think 1 candidate is enough proof to say that it's a rampant issue. My question to the employers that do credit checks is how often have they run credit checks on their current employees? Any company out there could very well have an employee who embezzled money from another company so how would you know if credit checks weren't the standard? I think that current employees and not just potential employees should get a credit check if that's what HR people are saying keeps them from hiring someone based on a credit report. Also, employers don't have to tell a candidate why they didn't hire them, so what's to say that they aren't telling the candidate they weren't hired based on a credit report?

Bernard Madoff probably had an excellent credit report and had he chosen to interview for a company, do you think they would have done a credit check? A far out example, but still the assumption is there and look where he is now.

Thanks, Laurie

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Michael D. Haberman, SPHR October 21, 2010 at 8:45 pm

Lance:
I agree with you. I am not a fan of across-the-board credit checks. I think that is the lazy way out of doing your due diligence. So perhaps a refinment of the FCRA might be appropriate. But a new law would be excessive and an absolute ban would be destructive.

Lauren:
Doing a credit check is not a good screening tool in my opinion. Credit checks should be done as one of the FINAL tools in deciding on candidates. Waiting until this step saves money, because you are doing it on fewer candidates. It also means that you have to fess up when you opt not to hire someone based on the credit check. And many companies don't have the backbone or courage to do that. Are credit checks the best tool? Probably not. Are they foolproof? Nope. Does it insure that you will never have someone steal from you? Nope.

But you have to ask yourself, is an imperfect tool better than no tool? I tend to think so.

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