Can Prospective Employers Check Your Credit Report?

Although federal law allows employers to check credit, some states don't.

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Has your credit taken a hit in the last few years? If so, you’re not alone: The recession has inevitably led to more late and missed payments, evictions, foreclosures, and other unfortunate events that can really do a number on your credit report. If you’re also looking for work, you may be concerned about whether and how a potential employer can check your credit report.

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.

This article explains each of these requirements. It also covers some state laws, which limit an employer’s ability to use credit reports in hiring.

State Law Limits

The economic downturn has led many politicians to reconsider whether it's fair or productive for employers to use credit reports in making hiring decisions. After all, this can lead to a vicious cycle, in which those with poor credit records are less likely to find work, which means their credit report will get even worse, and so will their job prospects.

At least ten states (California, Colorado, Connecticut, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont, and Washington) 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. According to the National Conference of State Legislatures (NCSL), more than 20 states are currently considering similar legislation. To find out whether your state is among them, go to the NCSL's detailed chart on www.ncsl.org.

If your state 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.

What the FCRA Requires

If your state allows employers to consider applicant credit reports in the hiring process, the employer must get the applicant's consent, warn the applicant if the employer plans to reject him or her based on the report, and give the applicant a final notice once the decision is made.

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.

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.

What to Do Next

If your state 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. 

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