Although federal law allows employers to check credit, some states don't.
Has your credit recently taken a hit due to late credit card payments, a foreclosure, or bankruptcy? If you're looking for work, you might be concerned about whether a potential employer can run a credit check on you.
Here's what you need to know.
Employer Credit Checks: Requirements of the Fair Credit Reporting Act
If an employer checks credit reports when hiring employees, it has to follow the legal rules set out in the federal Fair Credit Reporting Act (FCRA). The FCRA requires employers to:
- get your consent before pulling the report
- give you a warning (along with a copy of the report received) if the employer plans to reject you on the basis of the report, and
- give you an official adverse action notice if the employer does not hire you because of the contents of the report.
The purpose of these rules is to ensure the accuracy of credit reports by letting consumers know when these reports are checked, whether the reports include disqualifying information, and how consumers can challenge incorrect entries.
Investigations by public interest groups reveal that one-quarter to one-third of all credit reports include significant errors. Given these numbers -- and how often credit reports are consulted by lenders, employers, and landlords -- it makes sense that the law builds in a few consumer protections.
Below we'll explain each of these requirements. We'll also discuss some state laws that limit an employer's ability to use credit reports in hiring.
Written Consent
Before an employer requests your credit report, it must notify you and get your written authorization. This notice and authorization must be set forth in a separate document that doesn't include other information. In other words, it can't be a section of the company's standard employment application.
If you have negative information in your credit report, this gives you an opportunity to explain it in advance. Although you technically have the right to refuse to consent to the employer's request, the employer is also free to reject your application on that basis. The choice is really between consenting and remaining in the running, or refusing to consent and giving up on that job prospect.
Pre-Adverse Action Disclosure
If the employer decides not to hire you based on something in the report, it must send you a notice stating that it intends to take this "adverse action" (deciding not to hire you). With the notice, the employer must give you two documents: (1) a copy of your credit report, and (2) a copy of a notice from the Federal Trade Commission entitled "A Summary of Your Rights Under the Fair Credit Reporting Act," which tells you how to challenge any incorrect information in the report. And don't be surprised if you find mistakes and errors: Studies have shown that the majority of credit reports contain inaccuracies.
Adverse Action Notice
Once the employer makes a final decision not to hire you based on your credit report, it must send you another document called an "adverse action notice." This notice explains that the employer is not going to hire you and provides some information on your rights, including the right to dispute the accuracy of the report and the right to obtain an additional copy.
States That Ban or Restrict Credit Checks for Employment
At least eleven states have passed laws prohibiting employers from pulling credit reports at all or restricting how and when employers may use them to make hiring or other job decisions. Those states are:
- California
- Colorado
- Connecticut
- Delaware
- Hawaii
- Illinois
- Maryland
- Nevada
- Oregon
- Vermont, and
- Washington.
Some localities, including New York City, also prohibit employers from running credit checks on applicants and employees.
If your state or locality prohibits employers from checking applicants' credit reports or using their credit histories in hiring decisions, you are protected.
Even though the federal FCRA allows employers to consider credit reports, state laws that are more protective of employee rights override the federal law.
Why Would a Potential Employer Look at Your Credit Report?
A potential employer might view your credit report as an indicator of your overall judgment, reliability, or trustworthiness. If the job involves making business decisions or handling money, your employer might be interested in seeing how you handle your own finances.
Of course, a credit report doesn't always tell the whole story. You might, for example, have missed a number of credit card payments because you were paying for your child's urgent medical needs. That's why many states limit an employer's ability to run credit checks on applicants.
What Do Employers See When Checking Your Credit Score?
An employer who runs a credit check doesn't actually see your credit score. Instead, they receive a pared-down version of your credit report known as an "employment credit report."
An employment credit report contains a summary of your credit history for the last seven years, including:
- your payment history
- any outstanding debts, and
- bankruptcies.
For privacy reasons, your birth date, account numbers, and other sensitive information don't appear on your employment credit report.
What to Do Next
If your state or city restricts an employer's right to use your credit report in making hiring decisions, and you believe the employer violated that law, contact your state labor department to find out your options.
If the employer acted within the law, but your credit report prevented you from getting the job, you might want to think about cleaning it up as much as you can.
Check out Nolo's book Credit Repair; you can find lots of articles on credit issues in our Debt Management section.
