Should You Perform a Credit Check on Potential Employees?

You're all set to hire a new employee. You've interviewed the person thoroughly, called their references, and verified their skills. But there's one thing you probably haven't done: checked their credit.

Increasingly, savvy employers are using credit checks as another way to measure the integrity of potential workers. This is really nothing new in the business world. After all, companies have been using credit bureaus for decades to determine the reliability of vendors, suppliers, and other firms they do business with. So it makes sense for companies to do the same with people they're about to hire, especially if those people will be coming in direct contact with cash or sensitive information.

Indeed, a recent survey by the Society for Human Resources Management found that 60 percent of all employers run some type of credit check on their applicants. By checking the credit of a potential employee, you can see whether that person typically pays their bills on time and how responsible they are when it comes to money. This kind of information can tell you a lot about what kind of employee that person will likely be.

But before you start pulling credit reports on prospective employees, you have to take certain precautions. First, it's illegal in some states for credit reporting agencies to provide a credit report to companies that plan to use the information for employment screening. In particular, Hawaii and Washington ban companies from performing a credit check on potential employees.

However, in most states it's perfectly legal under federal law. Specifically, section 604 of the Fair Credit Reporting Act states that it's permissible to use credit information for employment purposes. The one caveat is that potential employees must give you written permission to access their credit report.

Also, keep in mind that credit reporting agencies won't provide you with the actual credit score of employees or prospective hires. Instead, they'll provide you with a credit report designed specifically for employers. This report contains information about the payment habits of the person in question but not an actual credit score.

Here's another important consideration. Employers are required under federal law to tell candidates if they used the credit information to deny them the job. In reality, however, most employers find some other reason for not hiring the candidate -- or simply don't give them a reason at all -- just to avoid all the legal complications and rigmarole.

While it may be perfectly legal to use a job applicant's credit report in the hiring process, some question whether it's ethical. After all, sometimes there are good reasons why people fall behind on their payments or can't pay their bills. An unexpected medical procedure, for example, or a long layoff can put normally trustworthy people on precarious financial footing. As a result, it may be unfair to penalize these people even more by denying them a job they are otherwise qualified to do.

That's probably why 16 more states, including New York, Ohio, Oregon, and South Carolina, are considering their own ban on employer credit checks, viewing them as just another hurdle for those desperately out of work.