Using Credit Reports to Make Hiring Decisions

What You Need to Know
According to a recent article on the Wall Street Journal website, 16% of employers surveyed use credit reports as part of the pre-employment screening process. This news may be particularly alarming for some individuals given the current economic climate and rising unemployment rates. However, it’s important to note that although the Fair Credit Reporting Act (FCRA) allows employers to take the information contained in a credit report into consideration when making a hiring decision, there are some limits as to how the information may or should be used.
Fair Credit Reporting Act (FCRA) Requirements
Employers are expressly prohibited from performing a credit check on potential employees without the written consent of the individual in question. Additionally, applicants must be notified in writing that a credit report may be requested. Before an applicant can be rejected based on credit report information, employers must make a pre-adverse action disclosure that includes a copy of the credit report and the summary of consumer rights under the FCRA. If a non-hiring decision is made, the employer must also provide an adverse action notice if credit report information has affected the decision in any way.
Consequences of Non-Compliance
There may be legal consequences for employers who do not get an applicant’s permission before requesting a credit report or who fail to provide pre-adverse action disclosures and adverse action notices to declined job applicants. The FCRA grants individuals the right to sue employers for damages in federal court. If the suit is successful, an individual may recover court costs and legal fees, in addition to receiving punitive damage awards for deliberate violations. Additionally, if the Federal Trade Commission or States become involved, civil penalties can be assessed.
Additional Considerations
Since the percentage of minority group members in the U.S. with poor credit ratings is significantly greater than that of non-minorities, the Equal Employment Opportunity Commission (EEOC) has advised and courts have held that consideration of credit histories in making employment decisions can disproportionately affect minority applicants and thus violates Title VII of the Civil Rights Act. Because of the potential for such an adverse impact, an employer must demonstrate that this type of selection criteria is justified by business necessity.
To avoid claims of discrimination against members of minority groups, employers must request credit checks in a consistent manner (i.e. for all applicants of a specific position with fiduciary responsibilities). If an employer is not consistent, applicants or employees can make a case that the use of credit information in making an adverse hiring decision represents unfair treatment on the basis of race, sex, or other protected personal characteristic.
For more information regarding the Fair Credit Reporting Act, please visit