Art, science behind credit checks

When is a credit check appropriate?
By Daniel Fallows
|Canadian HR Reporter|Last Updated: 06/21/2011

Question: We’ve never done background checks before but our organization is growing and we’ve made the decision to start them. There is some internal disagreement about whether or not we should bother conducting credit checks as part of the hiring process. Criminal checks and education verification are slam dunks, in our opinion. But when is a credit check appropriate and worthwhile, and how much time and expense does it add to the process?

Answer: The credit check is one of the most misunderstood and perhaps misused pieces of the pre-employment puzzle. It’s misunderstood because a number of companies have used credit checks as part of the process, but the actual application of the data obtained has been lost in the shuffle. It’s misused because a number of companies’ use of credit checks has not kept match with ever-changing privacy laws.

A credit check is a search of a credit bureau for the credit history of a candidate. It typically includes:

• name

• date of birth

• address history

• employment history

• a history of inquiries against the credit bureau

• information regarding loans, litigation and bankruptcies within the last seven years

• current and past collections (for seven years)

• information regarding credit cards and payments for the last seven years

• a credit score (if requested).

The search is performed with the informed consent of a candidate (in writing) and can usually be completed within one business day. The cost of a credit search varies from company to company but is normally in the range of $10 to $21.

When deciding whether or not to conduct a credit check, there are a number of things to consider. First and foremost, you need to know the regulations that govern your industry. Some companies or industries regulated under “point of sales” regulations — such as finance or banking — may have to perform credit checks as part of industry compliance. Should your industry not have this requirement, there are other factors to consider in determining if credit checks are necessary in the pre-employment screening.

Historically, clients have used credit checks across the board as a way to measure not only candidates’ financial condition but to evaluate their level of responsibility and honesty.

Candidate’s financial condition: The credit check will provide details on a candidate’s financial condition and answer the question “Is she financially sound?” Employers need to take into consideration people looking for a new position often have lost their old job. This puts financial pressures on the candidate and her financial situation. It may appear she is having financial problems but it is temporary and will be quickly resolved when she secures a new job.

Level of responsibility: The credit check will provide historical data on how a candidate has handled his personal finances over time. This indicates how a candidate might handle the corporation’s finances. While this line of thinking is valid, it must be applied to the position. Not all positions justify a credit check. If the candidate is being considered for a senior manager or accounting role, it makes sense to complete a credit search. If the position does not have financial exposure or responsibilities, the use of credit reports is unreasonable.

Honesty guide: The credit report provides more information than just credit information. It also includes information on a candidate’s employment history, address history and legal proceedings or litigation he is or was involved in. A candidate who frequently changes residences or jobs might be seen as unstable. A candidate may also omit a previous position from her resumé that she doesn’t want known. The credit report will reveal this and provide insight into how forthcoming a candidate has been with the recruiter.

Privacy laws across Canada require the collection of information be done by the least intrusive method possible. For example, to assess a candidate’s trustworthiness, would it be better to do a credit check or would employment or character references be more telling of his character? To determine the honesty of a candidate, a verification of his employment history might provide that information.

Privacy commissioners, when applying privacy laws (as shown in a case involving Mark’s Work Wearhouse in Alberta), can view credit checks as a much more intrusive method of accessing these areas than the alternatives. They have consistently taken the position a credit check should only be used to evaluate information that cannot be obtained in any other less intrusive method.

Credit checks are a powerful screening tool but they must be conducted for the right positions and in the correct manner. Always ensure you have appropriate authorizations from the candidate, the need for the credit check is justified by a legitimate occupational requirement and the information cannot be obtained through a less intrusive method. When the results of the credit check are reviewed, make sure all factors and circumstances are taken into consideration and allow the candidate to explain any irregularities before you make a final decision.

Daniel Fallows is national director of pre-employment screening solutions, records and research at Garda in Toronto. He can be reached at dfallows@garda.ca, (416) 915-9500 ext. 3770 or visit www.gardaglobal.com for more information.

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