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Should You Perform Credit Checks?

Author: Karen R. Harned Date: May 15, 2014

Find out whether it's wise for your small business.

When you are hiring a new employee, you want to do it right. That’s likely why approximately 47 percent of employers use credit checks when making hiring decisions. Checking job applicants’ credit may make sense, especially when you are filling a position in which the employee will be handling sensitive financial or customer information. But be careful; credit checks can expose you to liability if you don’t follow the proper procedures.

Does Your State Allow Credit Checks?

Only 40 states allow businesses to perform credit checks on prospective employees. The following 10 states do not allow employers to perform credit checks: California, Colorado, Connecticut, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont and Washington.

Fair Credit Reporting Act

If your business is in a state that allows employers to conduct credit checks, the Fair Credit Reporting Act governs the process you must use. First, you must notify the prospective employee that you want to run a credit check and obtain his or her written consent. This notice and authorization must be a separate document—it cannot, for example, be part of your standard employment application.

Second, employment attorneys advise you not to discriminate against a prospective employee based on bankruptcy data or a single instance of a garnishment in a credit report. If you choose not to hire someone after conducting a credit report, it should not be the sole basis for your decision.

Third, if you decide not to hire based on something in the report, you need to send a notice to the applicant stating that you are taking this “adverse action” (i.e., you intend not to hire him or her) and provide a notice from the Federal Trade Commission titled “A Summary of Your Rights Under the Fair Credit Reporting Act,” which tells the applicant how to challenge any incorrect information in the report.

As with all your hiring processes, you should consult an employment attorney to make sure you are in compliance with the FCRA and other employment laws. If you do it right, a credit check can be a helpful tool in the hiring process.

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