Credit History Inquiries Law and Legal Definition

Credit reports used for employment purposes help businesses reduce risk of fraud or theft, particularly in accounting or other financially sensitive positions. Credit reports also help businesses verify the identity of the applicant, which is very important in positions requiring security clearances, for instance. In today's environment, where the risk of terrorism is so great, verifying identities is becoming more and more important.

The Fair Credit Reporting Act (FCRA) and some state laws, which vary by state, govern the procedures used by employers to obtain credit reports on employees or prospective employees. Before you can get a consumer report for employment purposes, you must notify the individual in writing — in a document consisting solely of this notice — that a report may be used. You also must get the person's written authorization before you ask a crdit reporting agency for the report.

The credit report provided to employers is different in at two ways:

  • The credit reporting agency removes all account numbers from reports provided to employers. Employers do not need account numbers because they are not making a lending decision or conducting account reviews.
  • All information covered by equal opportunity employment laws is removed. That includes your date of birth and whether or not you have a spouse.

The Fair Credit Reporting Act governs how long items can remain in credit reports and when they must be removed. Some items have a 7-year "Statute of Limitations" while other items remain for 10 years or, in the case of tax liens, indefinitely. As of December 29, 1997 the reporting period runs 7 ½ years (7 years plus 180 days) from the date (month and year) of the last delinquency (known as "last missed payment:). The Fair Credit Reporting Act allows bankruptcy to be reported for up to 10 years. However, it is not mandatory for credit reporting agencies to report the bankruptcy for the full 10 years. Each credit bureau has its own internal policy on how long it reports any bankruptcy but typically, Chapter 7 is reported for 10 years and chapter 13 for only 7 years.

Additional Definitions

Credit History

A credit history is a record of an individual or company's past borrowing and repaying behavior. In the case of individuals, these records are collected and maintained by several large credit reporting agencies on behalf of companies that extend credit to consumers. These agencies gather and sell information about individual consumers, including whether a person pays his or her bills on time or has filed for bankruptcy. Whenever a bank, retailer, car dealer, or other business needs to decide whether to extend credit to a certain individual, they can access that person's credit history through the reporting agencies.

The Fair Credit Reporting Act is the federal law that gives individuals the right to examine their credit histories. It is designed to promote accuracy, fairness, and privacy of information in the files of every consumer credit reporting agency. There are three major bureaus that report credit information for individuals: Trans Union, Equifax, and Experian. At an individual's request, these bureaus or agencies must provide the information in the individual credit file as well as a list of everyone who has recently requested the file. Individuals are entitled to one free report every twelve months upon request.

It is important for both individuals and businesses to have a solid credit history and to periodically examine their credit reports to protect that credit history. For an individual, beginning to establish a credit history might entail opening a checking or savings account, applying for a credit card from a local department store, or taking out a small bank loan and making regular, on-time payments. A small business can obtain a favorable credit history in the same way. Credit issuers typically look at an individual or business's debt-to-income ratio to determine whether the borrower is a good or bad credit risk.

USE OF THE CREDIT HISTORY BY EMPLOYERS

For an employer, reviewing a job applicant's credit report may be a helpful step in pre-employment screening, retention, promotion, and even job re-assignment. Every employer has the right to review the credit history of all job applicants, as long as they have obtained a signed release from the potential employee for this phase of the background check.

In the past, employers were only concerned with a potential employee's credit history if they were going to handle money as part of the job. This is no longer strictly true. According to research by the Society of Human Resource Managers, published in an HR Focus article, 35 percent of employers now check credit history as part of the hiring process. Only 19 percent of companies reported doing so in 1996. A person's credit report offers a company a way to verifying an applicant's name, address (both current and prior), birth date, and social security number. Credit reports provide a detailed history of payments, liabilities, and total debts and financial obligations as well. Howard Dvorkin explained to Chris Penttila in an Entrepreneur article, "Credit history says a lot about a person, including whether or not they [sic] would make a good employee … People who have financial pressures are less productive than those who have none."

Using credit histories in the hiring process may be very useful but should be used with a full understanding of the number of errors that experts have shown appear in credit reports. Chris Penttila explains that more than 50 percent of credit reports were shown to contain errors of some kind in a 2000 study. With the chance of error so high, many employment attorneys are discouraging business owners from rejecting applicants based solely on his or her credit report.

Human resource managers recommend that an employer look at credit troubles that arose from causes beyond a person's control differently than credit troubles that result from seemingly reckless spending. The former may be due to a layoff followed by medical bills, or they may be due to identity theft. Credit trouble caused by such events may not be held against a potential hire if they can explain the circumstances and emphasize progress in paying the debts. The latter circumstances, however, may lead an employer to question a potential employee's overall judgment.

Finally, if an applicant is rejected for employment based on his or her credit history, the prospective employer is required by law to do the following: notify the applicant of the denial and reasons; send the applicant a copy of his or her credit report, and send the applicant a summary of his or her rights under the Fair Credit Reporting Act. The applicant must also be given 60 days in which to dispute any inaccuracies in the credit report upon which the rejection of employment was made.

BIBLIOGRAPHY

Fisher, Anne. "Staying Smart/Managing/Careers." Fortune. 26 October 1998.

"How To Do Background Checks Properly." HR Focus. August 2004.

Lank, Avrum D. "Poor Credit May Be Worse for Your Wallet." The Milwaukee Journal Sentinel. 15 September 2006.

Penttila, Chris. "Risky Business: Staff Smarts: Should a prospective employee's credit history determine whether he or she gets the job?" Entrepreneur. September 2003.

                                Hillstrom, Northern Lights

                                  updated by Magee, ECDI