Apr 13 2016 The Dangers of Hiring Employees with Bad Credit
Bad credit can poison a good applicant.
The credit check has become one of the most controversial aspects of the job search. Politicians are campaigning against it, advocates are arguing for and against it in major newspapers, and it’s easy for employers and applicants to feel stuck in the middle. So here’s a comprehensive overview of what credit checks are, why they’re useful, and when you should consider using them.
What Is A Credit Check?
Even many employers labor under some misconceptions about credit checks, so it’s worth discussing what it is. A credit check is a collection of information from one or all three of the major credit bureaus, TransUnion, Equifax, and Experian. None of these are government organizations, contrary to popular belief, nor is the data they collect verified by any government agency. Instead, they collect data from major financial companies and banks into a report. And like any company, there can be inaccuracies on reports, something you’ll need to be aware of when you look at any credit check. You also won’t need to worry about a FICO score; this is just a quick summary of the report used for faster approval purposes.
Your typical credit report has quite a bit of useful information. It has full and complete identifying information for each applicant you submit; credit lines and status for most types of debt your applicant may owe; credit inquiries, or everyone who has asked for the credit report of the applicant; and public records tied to an applicant’s credit, such as lawsuits, wage attachments, liens, and bankruptcies.
That said, it won’t be the full and complete view of many applicants credit history. Credit reports are limited to the last seven years of the record of the person in question, so relatively recent events may be left off the report entirely. It’s important to keep all of this in mind because a good credit report might not reflect other aspects of the background check you receive, and it illustrates that a credit check is just one part of a well-designed hiring process. That said, it can be a highly useful tool.
Why Check Credit?
Some might ask why running credit checks even have a point in light of these restrictions, but there’s real value to finding out an applicant’s credit history. A credit history, paired with other aspects, can give you a fuller and more complete view of an applicant’s character and history.
To start with, depending on your industry, good credit might be a crucial factor. Many jobs that involve the handling of money or valuables have credit checks as a matter of course, simply due to the fact that people who aren’t struggling with financial problems are better risks for the company in those roles. You may also have contracts with clients that require your employees to meet certain standards, and good credit is generally part of that role. In these situations, a credit report can mean the difference between keeping contracts and losing money, or being put in a tough spot due to poor employee decisions.
There’s a difference between a bad applicant and an applicant with a bad past.
A credit report in other situations can also help you filter out applicants who might be unsuitable due to personal behaviors that aren’t self-evident elsewhere. For example, if you see an applicant has engaged in a cycle of running up credit cards and declaring bankruptcy, or has repeatedly been pursued by debt collectors, that’s something you might be forced to consider when weighing hiring them. If you see an ongoing pattern of behavior, instead of a one-off moment of bad luck, you do have to ask yourself why that is, and what impact that might have on your company.
There can also be more subtle signs of personal problems you can suss out from a credit report. For example, credit reports are useful tools for checking previous addresses against other public records, and if an applicant has had a large number of former homes, it might reflect that applicants have personal problems or legal trouble. Keep in mind that this may not, necessarily, be criminal activity; it’s not uncommon, for example, for women avoiding domestic abusers to frequently change addresses.
The public records aspect, in particular, can be crucial in making hiring decisions. Often this contains the most important data for hiring decisions and reflects the character of the applicant the most closely. Often this is where financial issues linger the longest; liens on property, debts in collections, and other legal business can last for years and stay on a report as a result. Being able to go through this in detail will allow you to form a fuller, more complete picture of the applicant in front of you.
So, you’ve gathered the reports, you’ve assessed the information, and you’re still not sure about your hiring decision. When should you take a chance on an employee with a rough credit history, and when should you make an adverse decision?
Using The Credit Report
Credit reports can define your applicants better than you realize.
First of all, before making any adverse decision, be aware of your obligations under the law. The Fair Credit Reporting Act, or FCRA, has very strict rules about how and where you can take adverse employment action, and you need to adhere to these rules to the letter. Beyond that, you should ask yourself a few questions:
Did the employee bring up or otherwise explain their situation? There are all sorts of reasons people have bad credit, and contrary to stereotypes, it’s rarely due to poor character. Medical bills, family disability, and other problems might affect your applicants and should be weighed in any hiring decision.
Is the issue in question an anomaly? If an applicant has otherwise clean credit, and only one legal situation or account in default, it might be an error, or a more complicated situation than a report can clarify. Further research, or discussing the issue with the applicant, might help in this situation.
What does the rest of your research say? A credit report shouldn’t be conducted in a vacuum, but paired with a fuller background check, an interview, and any supplemental material you can put together. The more complete a picture you have of each applicant, the better your process will be.
A credit check is a crucial part of hiring the right person, and can help you avoid legal danger. But don’t let it be the only part of your decision; there’s more to any applicant than their bank account. If you’re ready to build a better hiring process, request a free background check trial.