A Guide to Employee Credit Checks

While pre-employment credit checks have long been required for compliance in financial and legal roles, credit checks have become commonplace in many companies, with employers reporting that they now routinely carry out credit checks as part of a comprehensive background screening process when recruiting for all positions.

What are employee credit checks?

An employee credit check, also called a credit report, is a useful tool in mitigating the risk of fraud, by uncovering bad financial situations an employee or candidate may be involved in. Although a positive credit check doesn’t guarantee that a candidate is trustworthy, it might bring up red flags which could cast doubt over a candidate’s suitability for a role which requires access to data, money, company accounts or assets. In addition, a bad financial situation might impact a candidate’s behaviour at work, and a solid credit report might indicate that a candidate would make a responsible staff member.

Credit checks also help ensure that candidates are who they say they are by confirming important information found in other checks.

Why should employers perform an employee credit check?

Why would employers want to know their prospective hire’s credit history and financial situation? Many would argue that including credit checks in background screening may reduce the risk of fraud, particularly when a prospective hire has bad debt. 

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Bad debt is commonly defined as having a past-due balance in more than 60 days, a debt that has been forwarded to the collector, and a debt written off by a creditor. Some employers also find it risky when the candidate’s debt is greater than 10% of the open position’s salary. 

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When an applicant has bad debt, there is a belief that the risk of fraud and theft increases. Moreover, an employee with a lot of debt may not be able to undertake their role properly. Financial stressors, after all, can lead to health and productivity issues. 

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In many cases, employers only conduct an employee credit check in the finance sector, particularly when the position will handle company or client money. Nowadays, however, more and more industries also include this check in their background screening, especially when the role is in a position of trust. This includes employees having access to sensitive information. 

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In general, with a thoroughly and properly conducted pre-employment credit check, you can determine if the candidate is who they say they are, have an idea if you can trust them with finances and sensitive information, and assess if they are responsible, professional, and organised as evidenced by their ability to handle their finances. 

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Soft Search vs. Hard Search

The type of searches used in pre-employment checks are called Soft Searches, and will confirm the candidate’s name, date of birth and address history as well as electoral roll status, CCJs or IVAs, missed payments, bankruptcy, and house repossessions. The information available to potential employers through a soft search is much less detailed than that which is available to creditors through a Hard Search.

To differentiate from pre-lending checks carried out by creditors, employers often use terms such as “adverse financial”, “financial probity” or “consumer search” to describe pre-employment credit checks. Despite Soft Searches being carried out through the same reporting companies (such as Equifax, Experion, etc.), employment credit checks don’t leave a mark on a candidate's credit file.

How is a credit check carried out?

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A specialist pre-employment screening company can help ensure that credit checks are thorough and effective. Veremark carries out comprehensive credit checks against all linked addresses, all previous names and aliases, and all addresses linked to aliases, to ensure that candidates are unable to conceal details of bad credit by omitting previous address details.

Requesting an employee credit check is simple. Candidates must provide consent to employers carrying out the credit check, along with full name and title, date of birth and current address - with this information, the check can begin.

Veremark completes credit checks in as little as five days, and our checks result in a full report which can be added to the Veremark Career Passport for easy sharing of data and protection through blockchain.

Remember to use the pre-employment credit check side-by-side with other relevant checks that ascertain the candidate’s ability to carry out their role. Veremark also offers the following checks, which you can include in your background screening:

• Criminal Records to help ensure workplace safety
• Educational Background to verify the candidate’s academic achievements
• Employment History to confirm their previous employment 
• Right to Work to ascertain whether an applicant can legally work in your country. In the UK, conducting a right to work check is a legal obligation.

What comes up on an employee credit check?

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In the UK, the following information are pre-employment credit check defaults:

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• County Court Judgements (CCJs)
• Bankruptcies
• Individual Voluntary Arrangement (IVA)
• Financial data, which include the number of accounts and loans held by the candidate. 
• Relocation data
• Correction orders / disputes
• Electoral roll registration history (to confirm their current address)
• Decrees
• DOB Verification
• Mortality Data
• Alias Data
• Administration orders

In other countries, the set of information collected may vary. In the USA, for instance, a credit check may ask for the names and addresses of previous employees. 

Can you deny a candidate employment if they have bad credit?

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Yes, you can. If, after thorough consideration, you believe that a prospective applicant’s bad credit will reflect on their ability to fulfil the role, you may refuse to offer them the position. In fact, if there are indications that they may compromise client and company finances as well as sensitive information, it might even be in the best interest of everyone not to employ them. If you do and they turn out to be a bad hire, you may be liable and your business may be negatively affected. 

Best practice for credit checks

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While it’s now becoming a standard practice for employers to conduct an employee credit check, remember that you must still follow best practices to establish fairness and reduce risks. Below are the dos for credit checks:

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Understand the Law

Before conducting an employee credit check, be sure to check the relevant laws on it. For instance, for US-based companies, if you’re using a third-party service provider, be sure that they follow the Fair Credit Reporting Act (FCRA). 

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FCRA states that you need to inform the candidate if the information in their credit file is the reason why they are refused employment. It also dictates that a candidate has the right to request and access the information the reporting agency has collected. A reporting agency is a company that provides information about people, such as credit reports, to employers for use in hiring decisions.   

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Likewise, also check if there are laws requiring you to conduct a pre employment credit check. In the UK, for example, it is required for the financial sector and law firms. 

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Notify the applicant and obtain their consent

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If you will partner with a reporting agency and use the credit information in your hiring process, you have to inform the applicant first. Give them a separate written notice about it so that everything will be in black in white. 

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Likewise, getting the applicant’s consent for an employee credit check is your legal obligation. If you’re collaborating with a service provider, you must still make sure that they are getting the prospective hire’s consent. Ask for the applicant’s written authorization to be certain. 

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Partner with a reputable reporting agency

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Nowadays, many businesses choose to collaborate with a reporting agency who can conduct a pre-employment credit check from start to finish. After all, partnering with a service provider has many advantages, including improved compliance to laws and having accurate information at a faster turnaround time. However, this can only happen if you choose a reputable reporting agency with a proven track record on background screening. 

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Remember to check for their compliance, how they collect and store information, accuracy and efficiency, and how thorough their checks are. 

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Treat all applicants equally in every step

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When not conducted properly, an employee credit check may be discriminatory. Hence, it’s crucial to treat all applicants equally regardless of their race, sex, color, religion, age, genetic information, or disability. These characteristics must not affect your decision to conduct a credit check, nor the way you interpret or use the results. 

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To avoid claims of discrimination, it’s essential that you as employers to:

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• Set clear standards for an employee credit check. What credit scores are acceptable? How about the income-to-debt ratio?
• Follow all the relevant laws 
• Allow candidates to explain significant findings and correct any inaccurate and incomplete information

Don'ts for credit checks

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On the other hand, below are things you must refrain from doing:

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Rely solely on a credit report

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In deciding whether or not to hire a candidate, remember that it’s not a good practice to rely solely on a credit report. For one, an employee credit check may have errors. In the US alone, 34% found at least one error in their information. 

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Furthermore, even if there are no inaccuracies in the report, remember that someone with a bad credit can be a good employee. Hence, don’t forget to weigh things such as their skills, education, attitude at work, and employment history. 

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Reject an applicant without an explanation

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In the US, under the FCRA, the applicant has the right to access their report and correct any inaccuracies. Hence, do not refuse them employment until you provide them a document entitled A Summary of Your Rights Under the Fair Credit Reporting Act. This allows them to check if the information is accurate and correct any errors.  

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If you decide not to hire the candidate, don’t forget to give them an Adverse Action Notice, which include:

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• The name, address, and contact information of the reporting agency
• A statement indicating that the reporting agency did not make hiring decisions and cannot affect them in any way
• A notice that they can dispute any incompleteness or error
• Their right to receive a free copy of the report from the reporting agency upon request, within 60 days

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Forget to safely dispose information properly

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Remember to destroy copies of the employee credit check by burning or shredding them. As for digital copies, don’t forget to delete them. This way, you can protect the candidate’s privacy and reduce the risk of the information being leaked and used elsewhere. 

Conclusion

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An employee credit check looks into the candidate’s financial history. By conducting this, employers can check if the prospective hire is a bad debtor, has declared a bankruptcy, or is not good at handling their money. 

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Predominantly, credit reports are for those in the financial and sectors. But today, more and more industries are including them in their hiring process, particularly when the position will handle client and company finances or sensitive information. 

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When not conducted properly, a pre employment credit check may be discriminatory. Thus, it’s crucial that employers follow all the relevant laws and treat all applicants equally throughout the process. 

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To improve accuracy, comprehensiveness, and compliance to laws, many businesses partner with a reputable reporting agency who can conduct credit checks from getting applicant consent to the reporting of data.

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