Risky Business

Should a prospective employee's credit history determine whether he or she gets the job?
Magazine Contributor
4 min read

This story appears in the September 2003 issue of Entrepreneur. Subscribe »

Screening job applicants used to be about checking resumes and references. Now, nervous employers are going a step further, running credit checks to weed out potential problem employees. Under current law, employers can reject applicants on the basis of their personal credit. But to what extent should an applicant's credit history influence a hiring decision? Obtaining a credit report is one thing; interpreting it is another.

Assessing credit history becomes a judgment call by those doing the hiring, says Frederick Lane, a former attorney and the author of The Naked Employee: How Technology Is Compromising Work-place Privacy (Amacom). Distinguishing danger signs from everyday finances isn't easy.

Credit history says a lot about a person, including whether or not they would make a good employee, contends Howard Dvorkin, president of Consolidated Credit Counseling Services Inc., a Fort Lauderdale, Florida, group that helps debtors get their finances in order. "People who have financial pressures are less productive than those who have none," Dvorkin says.

Running a credit check is another way to find a good, responsible employee when you consider the average American holds $8,000 in credit card debt, and personal bankruptcies have hit a record-high 1.61 million filings within the past year. Among other things, a credit report reveals payment history as well as court judgments, liens and bankruptcies.

of employees say they feel secure in their jobs.
SOURCE: Society for Human Resource Management

It makes sense to run a credit check in some jobs-management-level, banking or accounting positions, for example-where responsibility and integrity with money are key. But be careful if you're hiring an entry-level employee who won't have access to cash or the authority to spend it, says Michael W. Droke, head of the Employment & Labor Practice Group in the Seattle office of Dorsey & Whitney LLP. Credit checks that aren't clearly linked to a job description can send you into dangerous territory.

And credit reports aren't free of errors: A 2000 study by the Consumers Union, publisher of Consumer Reports Magazine, found more than 50 percent of credit reports contain inaccuracies such as mistaken identity, misapplied charges and uncorrected errors. "One in five consumers is at risk for errors in a credit report. That's a lot of people," says Pam Dixon, a research fellow for the Privacy Foundation, a Denver foundation that studies how comunications technologies and services pose a threat to personal privacy.

During the interview process, ask applicants to verify that their credit reports are correct. You must get an applicant's permission in writing before obtaining a credit report. There's always a story behind the numbers, and you may find some huge gray areas. For example, what if an applicant was a victim of identity theft four years ago, and it's still affecting his or her credit today? (The FTC received more than 86,000 complaints of identity theft in 2001 alone.) It's important to dig deeper so you don't automatically reject questionable candidates, Lane says.

If you decide to reject applicants based on their credit history, the Fair Credit Reporting Act (FCRA) requires you to notify them of your decision before you deny employment. You're also required to send rejected applicants a copy of their credit report, a summary of their rights under the FCRA and the contact information for the credit agency that supplied the credit report. Rejected applicants must also be told they have 60 days to dispute any inaccurate or incomplete information in the credit report you used to reject them. With the chance for error in credit reports, many employment attorneys are discouraging business owners from rejecting applicants based solely on credit, Dixon says.

Finally, there's the issue of medical information that can be inferred from credit reports. "You wouldn't believe the number of people whose medical bills have gone to collection while they wait for insurance companies to [pay]," Dixon says. It's information a rejected applicant could use as the basis of a discrimination claim. So look beyond the numbers to give otherwise good applications due credit.

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