Credit checks have become an increasingly popular tool for screening potential employees in recent years, providing businesses with a glimpse into the personal habits and responsibility levels of men and women before they join a company’s rosters. Used for years by the loan industry to determine the risk of default – as well as the likelihood a credit cardholder will carry a balance and thus, pay more in interest – credit background checks have only recently been used by employers and insurance companies as part of their risk-management process.
Why Screen Your Potential Employees’ Credit?
Hiring a new employee is always a leap of faith – not just faith in the hire’s ability to perform the job, but faith they won’t steal from you or your clients, exhibit chronic lateness or demonstrate other irresponsible habits that can wind up costing your company time and money – and can even threaten its reputation. Evaluating a prospective employee from their resume alone falls far short of providing many companies with the level of information they need to feel comfortable about making a hiring decision. References can provide a greater level of assurance, but many wily applicants can decide not to share contact information from dissatisfied former employers or they may use friends and relatives as false “references,” potentially resulting in hiring decisions based on misinformation – and leading to substantial risks for your company.
Credit information is gathered by credit bureaus that have been gathering and reporting information about financial habits for decades. While using credit data may not be the perfect solution for understanding the risk associated with a potential employee, the data do provide concrete information about the applicant’s past habits that can help you develop a more comprehensive and detailed overview of the applicant, using verified information of a much more reliable nature than can be derived from references or resumes.
If your business conducts credit checks as part of its pre-employment hiring process or if you’re considering adding credit checks to your existing process, here’s what you should know about what to look for in your reports:
What Information Do Credit Reports Contain?
If you’ve ever pulled your own credit report, you know how detailed and far-reaching the information can be. Credit reports include not only information about credit cards, personal loans and mortgage data, but also information about whether the person pays their bills on time, whether they’re chronically late in paying or a late payment has occurred rarely or occasionally, how late their payments have been, whether they’ve ever defaulted on a loan or declared bankruptcy, if any liens have been placed against them, whether there are collections accounts opened against “bad” debts, and whether they’ve ever had legal action arising from unpaid loans or credit cards.
Plus, credit reports don’t just offer a current snapshot of the applicant’s financial habits and responsibilities – they show data stretching back seven years and sometimes longer, as in the case of legal action. Many consumers complain current hiring decisions shouldn’t be made on “old” data; but by seeing a long and detailed history of financial habits, it’s actually easier for employers to pinpoint aberrations that may have indicated the applicant was going through a hard time, compared to a long history of poor financial decisions.
How To Use Credit Data in Your Hiring Process
Companies use credit data in different ways depending on the nature of their business and the position that’s being offered. For instance, a position that involves handling cash or cash equivalents including customer credit card data might involve a higher degree of risk than a position that doesn’t involve access to financial data or cash. But even when a position doesn’t involve money, a credit report can still provide important data about how the person will fit into your corporate culture and whether they’ll be a positive reflection on your brand.
To use credit report information to identify potential risks or “red flags,” business should pay special attention to troubling habits or data such as:
Chronic lateness in making payments
The number of accounts where chronic lateness has occurred
How late an applicant has been in making payments
A history of court action, including liens and bankruptcies
The number of collections accounts
The number of open accounts with high balances
How often the applicant has gone over the credit limit
How recent these “negative occurrences” took place
Broadly speaking, someone who went through a difficult financial time several years ago but who has since demonstrated good financial habits might be a better choice than another applicant who has a consistent history of late payments.
Beyond immediate needs, businesses can also use credit data to establish benchmarks, identifying fiduciary responsibility characteristics that represent an ideal employee and that can be used as part of the general framework for a company’s hiring process. As any seasoned executive knows, having a robust hiring process is one of the keys to hiring the best employees.
Of course, having bad credit isn’t a guarantee someone will be a bad employee. But having access to the applicant’s long-term financial habits can help you manage your risk more effectively so you can feel more confident your hiring decision is sound. Plus from a completely pragmatic point of view, by ordering a credit check on potential hires, you create a paper trail that demonstrates your company took every avenue possible to hire responsibly, and that can go a long way in the event something does happen that triggers an audit or damages your company’s brand.