Pre-Employment Credit Checks

Is it a good business practice to perform credit checks on candidates for every position in your company?

Credit checks on every candidate, for every position, are risky and should only be done with a good understanding of the potential issues.

Credit checks provide a prospective employer with information about a candidates overall credit score, credit card and loans balances, payment history, debt ratio and other financial information. They do not, on their own, tell you about a candidate’s trustworthiness, work ethic, or other key factors related to employment.

The Equal Employment Opportunity Commission (EEOC) does not support credit checks for every position, since such a practice can lead to discrimination, even without the employer having such an intent. Studies have shown that minorities as a group have lower credit scores, resulting in a disparate impact against those groups, which even though based on “neutral” employer policies, is still prohibited by Title VII and FEHA. For example, the Texas Department of Insurance concluded credit checks did have an adverse impact after its own study found worse credit scores among the races studied, including blacks (10-35% worse) and Hispanics (5-25% worse). If your practice of using credit scores has a disparate impact on minorities, you could be liable for discrimination if you are not able to show the credit report is “job-related and consistent with business necessity”.

To meet this standard, you have to be able to show there is a legitimate reason the credit check is needed. For example, a position that requires employees handle cash or checks, have access to bank accounts, or handle sensitive financial transactions would meet this standard. An office clerk who answers the phones, files, and does other routine office work without any access to cash or financial files would normally not.

Credit checks are not accurate predictors of job performance. While some employers believe these indicate a candidate’s ability to manage their personal finances and are a predictor of whether an employee might steal, those reasons have not been validated. That lack of relationship between credit reports and performance is causing fewer employers to rely on these.

For example:

“Five years ago, nearly all employers who bothered to do background checks wanted a credit report pulled, said James Lee, chief marketing officer of ChoicePoint Inc., which does 6 million background checks annually. Today, far more employers are screening their workers, Lee said, but fewer than 30% of ChoicePoints customers want credit information. Credit has not turned out to be a good predictor of workplace theft. This is what our customers are telling us, anyway, Lee said. A better predictor is a criminal history involving bounced checks.”

Source: moneycentralmsn.com 2007

Some considerations if you decide to use credit checks:

• Identify what you expect to obtain from the credit check, and evaluate other options such as social security traces, criminal checks, and psychometric assessments that identify specific attitudes such as work ethic, workplace theft, and reliability. Your YPP HR Manager can assist you with this evaluation.

• You should identify the job-related purpose for each position you plan to require credit checks for. If you do not have a legitimate job-related reason, do not do credit checks on candidates for that position.

• Ensure that yourprocess for credit checks complies with the Fair Credit Reporting Act, including proper notices to the candidates and an opportunity for the candidate to respond to your assessment of credit issues. YPP’s background check process complies with FRCA.

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