Credit Checks in Employee Selection (Part 1 of 2)

Summary By: Ian B. Mondrow, M.A.

A selection test is a process that employers implement to hire job candidates or make promotion decisions. In national survey of retail employer, it was found that 48% of the participants utilized credit checks as a selection tool in 2005 (Hollinger & Langton, 2006 as cited in Nielsen & Kuhn, 2009). This number has likely increased since then. Unlike most selection test, a credit check does not ask candidates any questions and does not allow for any answers. Credit checks provide information on an individuals financials including credit cards, mortgage debt, payment history, previous addresses and previous employers. Unlike traditional credit checks, an employer will not receive any calcuated credit scores. The date of birth is also not included. Some employers use credit reports to merely verify employment history and previous addresses, while others use them as a formal selection tool.

Credit checks have become a standard process in hiring for many organization and therefore it is vital for every individual to know the legal implications behind this process. According to the Fair Credit Reporting Act (FCRA), an employer cannot check one's credit score without obtaining signed permission from the candidate, offering the candidate a copy of the report and inform individuals if the report had any basis for not hiring/promoting them. In addition, federal law prohibits employers from discriminating against an individual has filed for bankruptcy.  Since a credit report is not a series of questions, it is not possible to establish criterion validity and therefore it can be difficult to prove that the report is related to a job. As a result, some states have laws stating that credit reports can not be obtained unless "substantially job-related" to the position. In 2007, this law was passed in the State of Washington as Senate Bill 5827.

There are several perspectives as to why credit checks are used in the selection process: (1) employees  facing financial issues will be more likely to steal and (2) the credit check can be representative of one's consciousness and responsibility. Currently, there are no studies validating that credit checks are related to any personality traits but previous studies have found that credit scores have a positive correlation with counterproductive employee behavior and absenteeism.

To make matters more complicated, credit checks may increase an employers probability of adverse impact as some minorities are more likely to have poor credit histories (Gallagher, 2006 as cited in Nielsen & Kuhn, 2009). If adverse impact is present, employers must prove that a credit check predicts successful job performance. Furthermore, majority of credit reports contain one or more mistakes with one out of four containing a serious error. Therefore, the information may not even be correct!


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Source: Nielsen, M.L., and Kuhn, K.M. (2009). Late payments and leery applicants: credit checks as a selection test.  Employ Respons Rights J, 21, 115-130.