Do's and don'ts of performing a credit check for employment

A credit report can be an important part of a background check for potential employees. Find out the requirements your business must follow when obtaining credit reports for applicants.

by Brette Sember, J.D.
updated November 08, 2022 ·  4min read

Before you hire an employee for your business, it's a good idea to do a background check. As part of this process, you may also opt to perform a credit check. But before doing so, be sure you are clear on the legal and professional requirements and potential ramifications.

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Understanding credit checks for employment

When you're hiring an employee, you want to be sure you're bringing someone on board you can trust. A credit check can give you important information about potential employees that could help with your hiring decision.

A credit check for employment does not provide the applicant's full credit history, such as their credit score or even date of birth. Requesting the report does not register as an inquiry in the same way applying for a loan does, so the check itself won't impact the applicant's credit.

When you run a credit check, you receive information about the applicant's timeliness of payments and amount and types of debt. A report showing a lot of late payments may possibly indicate the individual is not very organized or dependable. A person with a lot of debt might be experiencing financial trouble, which some employers view as a sign of potential to engage in fraud or theft. However, it's important to note that there is growing pressure on employers to understand that many people in financial trouble are can be honest and hard-working employees.

Do's for credit checks

If you decided to conduct a credit check as part of the hiring process, be sure to follow these steps and requirements:

  • Understand the law. While the federal Fair Credit Reporting Act (FCRA) permits employers to do credit checks on employees, many states now limit when you can do a credit check, so be sure to read up on your state's laws. Many states allow credit checks on employees who handle money, have access to financial information, or are in management or law enforcement.
  • Always follow FCRA rules. Keep in mind that the FCRA requirements apply when you use a reporting agency to obtain a report, but, to fully protect yourself, follow FCRA rules even if you decide to gather background information on your own.
  • Give notice to the applicant. If you plan to use a reporting agency for a credit check, you must give the applicant written notice separate from the actual application they complete. The notice must be clear that you may use the report in your hiring process.
  • Obtain permission from the applicant. Before you can run a pre-employment credit check, you must receive written authorization from the applicant to do so.
  • Certify your compliance to the reporting agency. When you hire a reporting agency to obtain credit reports, you must certify to them that you gave notice to the employee, received written authorization, and are in compliance with all FCRA requirements.
  • Make sure you treat all applicants equally. Race, color, sex, nationality, religion, genetic information, age, or disability should not impact your decision to run a credit check or the way you interpret and use the results.

Don'ts for credit checks

Do not do any of the following when conducting a credit check:

  • Rely solely on a credit report. Not only can someone with a bad credit report be a good employee, but a 2013 study found that one in eight people with bad credit state that it's due to reporting mistakes in their credit report.
  • Reject the applicant without explanation. Under the FCRA, before you decide not to hire an applicant because of their credit report, you must provide them with a copy of the report you used and the document entitled A Summary of Your Rights Under the Fair Credit Reporting Act. They then must have an opportunity to respond to let you know if the report is incorrect.
  • Fail to give the employee an adverse action notice. When you do notify the applicant that they didn't get the job based on their credit report, you must provide them with four pieces of information:
    1. The name, address, and phone number of the reporting agency you used to obtain the report
    2. A statement that the reporting agency did not make the hiring decision and can't give reasons for it
    3. A notice of the applicant's right to dispute the accuracy or completeness of the report or information in it
    4. Their right to receive a free copy of the report from the reporting agency upon request, within 60 days
  • Forget to safely dispose of credit reports. Once you are done with credit reports, you must get rid of them by shredding, burning, or destroying paper copies and deleting digital copies.

A credit report can be an important addition to a background check on a potential employee, but it is important to fully understand the legal requirements involved with accessing these reports.

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Brette Sember, J.D.

About the Author

Brette Sember, J.D.

Brette Sember, J.D., practiced law in New York, including divorce, mediation, family law, adoption, probate and estates,… Read more

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of the author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.