The Impact of Employer Credit Checks on Credit Scores
Contrary to widespread misconception, credit history checks carried out by employers do not affect an applicant’s credit score. These checks are considered soft inquiries rather than hard inquiries, which means they do not affect an individual’s credit score. Soft inquiries resulting from employment credit checks are only visible to the applicant and do not affect the decisions of other potential employers or lenders.
Understanding this distinction is crucial for applicants, as it dispels the common apprehension that applying for various jobs could damage their credit score.
Legal Rights and Regulations Surrounding Credit Checks For Employment
The Fair Credit Reporting Act (FCRA) sets the guidelines for what information can be included in a credit report and how it can be used. It is essential for employers to be aware of these guidelines when conducting credit checks for employment. By staying within these legal parameters, businesses can make informed hiring decisions without infringing on the rights of their potential employees.
When carrying out a credit check, employers are obligated to comply with federal, state, and local laws. The FCRA requires:
- Obtain written consent before conducting a pre-employment credit check
- Provide notification to individuals before conducting the check
- Notify individuals about the check after its completion if the information is used for adverse action
- Employers must also comply with FCRA requirements when using external agencies for any background check.
- In addition to federal laws, certain states have enacted specific legislation that restrict employment credit checks and limit the use of credit information for employment decisions. In markets with specific protections against credit discrimination, such as New York City with the Stop Credit Discrimination in Employment Act, employers could be at risk of non-compliance if they fail to respect the exceptions to these laws. Therefore, employers must ensure they are fully aware of all relevant laws to avoid substantial penalties, fines, and legal challenges.
How Employers Check Credit
There are two main ways to perform an employer credit check: a do-it-yourself approach or collaboration with a background check company such as KRESS Inc.
Working with a specialist ensures compliance with the regulations and laws surrounding using credit reports for background checks. Regardless of the method, the FCRA mandates employers to disclose to applicants or employees that consumer reports may be used for employment decisions and to obtain consent to acquire these reports.
Running a pre-employment credit check involves the following steps:
- Have a permissible purpose
- Provide appropriate disclosure
- Receive consent from the candidate
- Notify applicants in writing and obtain their written consent before checking credit reports
These steps ensure that the process is transparent and respects the rights of the candidate.
Handling Adverse Action Based on Credit Check Results
A defined procedure must be followed if a potential employer decides against hiring an applicant due to their credit report. This includes sending a pre-adverse action notice that advises of their intent to take such action and includes a copy of the consumer report and a written summary of the applicant’s rights under the FCRA.
The employer is then required to provide the applicant with a reasonable period of time, typically a minimum of five business days, to review and respond to the information in the pre-adverse action notice before a final decision is made.
If an applicant disputes the information in the consumer report after receiving a pre-adverse notice, the employer must document their consideration of the applicant’s explanation or dispute before making a final employment decision.
Upon deciding that adverse action is warranted and after the waiting period, the employer must send a final adverse action notice to the applicant. The notice should include:
- The decision
- The contact information for the consumer reporting agency
- A statement that the agency did not make the decision
- The applicant’s right to obtain another free copy of their report and to dispute its accuracy.
