Are Credit Reports Relevant When Hiring?

Does your credit union run credit checks to screen potential employees? Nearly 50% of employers use them for some positions, reports the Society for Human Resource (HR) Management.

Credit reports clearly have relevance for financial positions in any organization, such as chief financial officer, controller, teller, or anyone else handling cash, says Stephanie Lewis, an attorney at Jackson Lewis LLP. “It’s a correct and logical conclusion that dangling an opportunity to steal in front of someone who is living beyond their means is an unnecessary risk,” she says.

The challenge, according to a report from EmployeeScreenIQ, is to make sure the use of credit reports is fair, legal, and effective. Many people have experienced financial challenges during the Great Recession. They’re trying to gain employment to repay their debts, but are worried that potential employers are using credit reports to unfairly deny them work.

Some states are passing or proposing legislation around the use of credit histories. And a bill in the U.S. House of Representatives proposes amending the Fair Credit Reporting Act to add a job-relatedness requirement for employer use of credit reports.

When is a credit report relevant to the job? In addition to jobs that require handling cash, other examples listed in the report include:

• Positions of trust, where an employee handles a client’s money or possessions, such as attorneys or real estate agents; and
• Information technology jobs that have access to confidential client information, which might create a risk of identity theft.

Your credit union’s internal audit team can identify jobs where a credit report is relevant, but that’s not enough, says EmployeeScreenIQ.

“You have to be able to articulate the reason,” notes the report. “It’s wise to document the rationale as to why some jobs are deemed to pose a risk such that a credit history is relevant. This rationale needn’t be complex, but HR needs a process to interpret the credit information.

“Many questions arise when you use a credit report. If someone has unpaid debt, is it because of divorce, an uninsured illness, or perhaps an unlucky turn in the housing market? It helps if HR understands that the point of the credit report is to raise red flags, not to automatically exclude a candidate. The analysis of the credit report should be to see if there are any red flags that need further investigation or explanation by the candidate.”

The EmployeeScreenIQ report suggests several actions employers should take if they do find red flags in potential hires’ credit reports:

• Give the candidates a chance to explain. There are often good reasons for someone’s financial difficulty or the credit report might have errors;
• Provide applicants with a copy of the credit report and a copy of the rights under the law before taking adverse action;
• Be aware that a credit report red flag is simply one factor in the overall decision as to whether the candidate is the best choice. Recruiting decisions are best made after weighing a range of evidence; and
• Establish a process that evaluates each applicant on an individual basis while maintaining consistent application of the credit union’s standards.

While you don’t want to hire an individual who later steals from your credit union or one of its members, requiring credit checks for all positions without sound rationale might cause problems down the road, says the report. Make sure the credit union documents how it uses credit reports, and that it applies them effectively and fairly.