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To Check or Not to Check: The Pros and Cons of Using Credit Reports in the Hiring Process

The growing use of credit histories in hiring decisions by employers has heightened concerns that, at the very least, qualified and financially pressed candidates are being denied jobs due to circumstances outside their control, or more seriously, that the practice itself is discriminatory. Given the high unemployment rate, foreclosure crisis and difficult economic times and the corresponding negative impact to credit, particularly that of minorities and women, the credit check practice is being subject to increased scrutiny by government agencies, federal and state legislators, and social scientists. Indeed, the EEOC recently held a public meeting, in order to gather information from a diverse set of experts, on the practice of using credit histories as employment screening devices and to explore the extent of this practice, its efficacy, and its potential impact on different populations.1Shortly thereafter, on Dec. 22, 2010, the EEOC filed a lawsuit against Kaplan Higher Education Corporation (Kaplan), a nationwide provider of postsecondary education in the U.S., alleging that Kaplan engaged in pattern or practice of unlawful discrimination by refusing to hire a class of Black applicants nationwide based on their credit history.2 Although it is still legal for employers to review the credit history of applicants under certain circumstances, this should only be done with caution and after determining that credit history is directly related to the job and necessary for business purposes. 

This article will discuss the extent of this practice and why it is used, what credit information is gathered and reported, and how and when in the hiring process credit history is used to make an employment decision. It will then address the risks associated with such practices and the legislation that is designed to limit such risks. Finally, it will identify the factors employers should consider in determining whether or not to use credit reports in their hiring process.

The Who, Why, What, How and When of Employers’ Use of Credit Reports

Certain employers have utilized credit checks in some form in their employment screening process for over 40 years since prior to the passage of the Fair Credit Reporting Act in 1970.3 However, the use has increased dramatically since then. In the past, besides governmental bodies, routine credit checks on potential employees were generally done only by banks and financial service companies, but today employers in other sectors are increasingly including credit reports in the screening process. In fact, recent surveys indicate that approximately 60 percent of employers use credit histories in some portion of their hiring decisions, up from just 19 percent in 19964 and 35 percent in 2001.5

The increased use of credit information is driven, in part, by the need for background information on potential employees in the current environment where it is difficult to obtain anything other than the most basic information in job references.6 More specifically, the most common reasons cited for why employers use credit checks for employment purposes are as follows:

  • To comply with a requirement of an external agency or industry standard (e.g., bonding company, state or local government, Payment Card Industry’s Data Security Standards (PCI DSS7)). 
  • To reduce potential liability due to negligent retention and hiring.
  • To limit theft and embezzlement based on the belief that employees in financial distress have an increased likelihood to steal or accept bribes.8
  • To assess overall trustworthiness, reliability, responsibility and/or judgment.
  • To help predict job performance.
  • To confirm employment history.

The information provided in an employment credit report is a modified version of a standard credit report and is provided by one of the three major reporting agencies (Experian, TransUnion and Equifax). However, contrary to popular belief, there is no credit score in an employment credit report and it does not place an “inquiry” on your credit file, which tends to lower your credit score if you have too many.9 Employment credit reports contain an individual’s name (and other names associated with that person in credit files), social security number, past addresses, past employers, information related to past due accounts, accounts in collection, and charge offs.10Therefore, before the employer is able to make a decision based on a credit report, they typically must spend some time reviewing the report to determine if it is positive, negative or neutral. In fact, according to the SHRM study, 87 percent of employers speak directly to applicants and allow them to explain the circumstances surrounding the information contained in their credit report before making an employment decision.11 Given this time commitment and cost, employers most often use a credit report as a final step in the hiring process, after an interview is conducted and/or a conditional offer has been made, as opposed to for screening out multiple applicants early in the process.

The large majority of employers only use credit information for certain positions, typically those that have access to company or client funds, or access to sensitive information, including social security numbers or other personal data, banking information, trade secrets or other company confidential information.12 This could include numerous positions in a variety of industries in the private sector, such as: managerial positions with access to financial or personal information, attorneys, real estate professionals and property managers, IT professionals, pharmacists, Human Resources, finance employees, health care professionals, etc. Interestingly, however, although the credit check is a component of the hiring decision for these positions, they ranked as the lowest among a list of criteria employers typically use in making hiring decisions.13

The Risks Associated with Using Credit Reports

During the EEOC’s Public Meeting in late 2010, the panel of experts identified several risks associated with the use of credit reports in the hiring process. They include the following: credit reports suffer from high rates on inaccuracy, credit histories have not proven to be a valid predictor of job performance or trustworthiness, the use of credit histories in hiring creates a catch-22 for unemployed job applicants and thus hampers economic recovery for millions of Americans and, most significantly, credit background checks disproportionately impact certain minority applicants.14 Each of these risks is likely to be addressed in EEOC v. Kaplan.

Indeed, the EEOC lawsuit against Kaplan should serve as a warning to employers nationwide. According to the EEOC, this is only the third time that it has sued over the misuse of credit reports in employment and typically only brings cases when it is convinced that serious abuse has occurred.15 The lawsuit, which was filed in federal district court in Cleveland, is seeking a permanent injunction to stop Kaplan’s use of credit histories in hiring and other employment decisions, as well as lost wages and benefits and offers of employment for people who were not hired because of Kaplan’s use of job applicants’ credit history.16 Kaplan, which conducts background checks on all applicants, denied the charges and took the position that the use of credit reports is a necessary component of its background checks into applicants who would be dealing with financial matters such as financial aid, if hired.17 The EEOC has alleged that the practice violates Title VII because it has had “a significant disparate impact” on Black applicants and is neither job-related nor justified by a business necessity.18

Under Title VII, an employer may use any information in evaluating an applicant as long as the employer does not intend to discriminate against an applicant on the basis of their membership in a protected class (referred to as “disparate treatment”) or the employer’s use does not have a disproportionately negative effect on people in a protected group (referred to as “disparate impact”). In the latter scenario, the facially neutral practice having a “disparate impact” is unlawful unless the employer can show that the practice is job-related and consistent with business necessity.19 The analysis then turns to whether a less discriminatory alternative exists that meets the employer’s business need.20

It is unlikely that the alleged disparate impact will be successfully refuted, as numerous studies have documented how, as a group, African Americans and Latinos have lower credit scores than whites.21 According to Michael J. Zimmer, a professor of employment law at Loyola University of Chicago, the EEOC would not have brought the case unless it had reviewed statistics about Kaplan’s hiring.22 When it comes to job-relatedness, Justine Lisser, an EEOC spokeswoman, said that credit histories are often inaccurate and might not be a good indicator of a person’s qualifications for a particular job.23 Lisser points out that these reports were not compiled to show responsibility, but rather to show whether or not someone was paying the bills, which is not always the same thing.24 Indeed, although there is considerable research that supports the use of credit scores in making consumer decisions, there is little research exploring the implications of using credit checks in employment decisions.25 Moreover, many people end up with a negative credit history due to circumstances outside their control, such as layoff, divorce, identity theft or medical bills.26 Finally, even if an employer is able to show that the use of credit checks is job-related, in order to prove that there is a business need for the practice Title VII requires that they explore a “less discriminatory alternative”.27

The FCRA and other Recent Legislative Developments

There already are both federal and some state statutes that protect applicants and employees from the misuse of credit background reviews. The FCRA is a consumer protection statute that regulates an employer’s ability to obtain and use information relating to a consumer’s credit history and the obligations of the third-party reporting agencies that provide such information. Specifically, the FCRA requires the following:

  • Prior to requesting a credit report, an employer must provide to the prospective employee a written notice stating the source of the information and how it will be used, and get their consent to obtain the credit information.
  • Before obtaining the credit report, an employer must certify to a third party consumer reporting agency the following: (1) that it is permissible to obtain the information, (2) that the employer will comply with the disclosure, authorization and adverse action provisions of the FCRA, and (3) that the employer will not use the “information from the consumer report . . . in violation of any applicable Federal or State equal employment opportunity law or regulation.”
  • If an adverse employment action is taken against a prospective employee due to the information contained in a credit report, the employer must provide to the employee a copy of the credit report and a copy of the FTC’s “Summary of Your Rights Under The Fair Credit Reporting Act” and inform the prospective employee of his or her right to dispute the accuracy or completeness of information in the report prior to adverse action being taken.28

In addition, a handful of states, including Hawaii, Washington, Oregon, and Illinois, have banned or severely limited the use of credit reports in hiring.29 Other states, including Connecticut, Georgia, Maine, Maryland, Michigan, Missouri, New Jersey, New York, Ohio, Pennsylvania, South Carolina, Vermont, and Wisconsin have proposed similar legislation. The California legislature passed legislation limiting the use of credit reports in hiring, but it was vetoed by the Governor in 2008 and 2009.

At the federal level, in addition to The Equal Employment for All Act, HR 3149, which has been pending since July 2009, Senator Diane Feinstein of California recently introduced SA 3795 as an amendment to the Fair Credit Reporting Act and part of an amendment bill, S. 3217, designed to promote financial stability.30 This Bill proposes to restrict an employer from using a “consumer’s creditworthiness, credit standing, or credit capacity” in making any employment decision or for the basis of taking any adverse action, regardless of whether a consumer gives an employer consent to use such information. The only exceptions to this prohibition would be for: 1) national security or FDIC clearance, 2) employment with a state or local government agency which requires the use of the information; 3) employment in a management position with access to customer funds at a financial institution; or 4) as otherwise required by law.31 Because this bill would effectively prohibit the use of credit history in employment background checks except in extremely limited circumstances – mostly government employment – trade associations representing millions of employers are planning to write to Senators to express their opposition to the bill.32

Each of these statutes contains restrictions that focus on job relatedness. However, because these laws and bills establish varying standards for the permissible use of credit history in employment decisions, employers with multi-state operations will need to follow and track this legislative trend and may be required to vary their use of credit history in employment decisions on a state-by-state basis.

Factors to Consider in Determining Whether, and How, to Use Credit Histories

If an employer currently uses, or is contemplating the use of, credit histories to evaluate applicants, they should consider the following:

  1. Is there a clear policy or practice regarding what positions will include a consideration of credit histories?
  2. Are they used consistently for all applicants to those positions?
  3. Is there a sound business reason to use the credit information for each of the positions that they are reviewing it for? That is, is it job-related? (i.e., will the position require the handling of money or assets, making fiduciary decisions, access to trade secrets or confidential information?)
  4. Are there any applicable laws in the states in which they have employees? If so, is the employer considered a “covered employer” and are their current policies and practices consistent with such laws?
  5. Are they getting the credit information from a reliable source?
  6. Does the credit information have a record of reliability?
  7. Have their HR professionals and/or hiring managers been trained in how to use and/or interpret credit reports?
  8. Are applicants being given the opportunity to review and respond to the information contained in the credit reports or are all applicants with a weak credit record screened out?
  9. Is the credit history used as a deciding factor between applicants with equal qualifications?
  10. At what point in the selection process is it being used?

1 EEOC Public Meeting, Employer Use of Credit History as a Screening Tool (October 20, 2010), available at

2 EEOC Press Release, EEOC Files Nationwide Hiring Discrimination Lawsuit Against Kaplan Higher Education Corp. (December 21, 2010) (“The EEOC attempted to reach a voluntary settlement before filing suit”). 

3 EEOC Public Meeting, Statement of Pamela Quigley Devata, Esq. Seyfarth Shaw, LLP (October 20, 2010), available at

4 EEOC Public Meeting, Statement of Chi Chi Wu, Esq. National Consumer Law Center (October 20, 2010), available at, citing, Matt Fellowes, Credit Scores, Reports, and Getting Ahead in America, Brookings Institution at n. 3 (citing 1996 data from the Society for Human Resource Management). 

5 EEOC Public Meeting, Statement of Sarah Crawford , Esq. Lawyers Committee for Civil Rights Under Law (October 20, 2010), available at, citing, Society for Human Resource Management, Background Checking: Conducting Credit Background Checks (Jan. 22, 2010), available at and Thomas Frank, Job Credit Checks Called Unfair, USA Today (February 13, 2009). 

6 EEOC Public Meeting, Statements of Christine V. Walters, MAS, JD, SPHR, Society for Human Resource Management and Pamela Quigley Devata, Esq. Seyfarth Shaw, LLP (October 20, 2010), available at

7 Also called PCI Compliance – a complex set of network security and business practice guidelines adopted by Visa, MasterCard, American Express, Discover Card and JCB to establish a minimum security standard to protect customers’ credit card information. They require all businesses with access to credit card data to perform credit history checks on potential employees who will have access. See EEOC Public Meeting, Statement of Christine V. Walters, MAS, JD, SPHR, Society for Human Resource Management (October 20, 2010), available at

8 Association of Certified Fraud Examiners’, 2010 Report to the Nation on Occupational Fraud and Abuse (Citing “financial pressures” as a” key motivating factor” behind check tampering, theft, and fraudulent reimbursement) (The study also found that “living beyond financial means” and “experiencing financial difficulties” were the two most common warning signs displayed by perpetrators of workplace fraud”). 

9 Privacy Rights Clearing House, Fact Sheet 16: Employment Background Checks: A Jobseeker’s Guide (Posted December 1994/Revised October 2010), available at

10 EEOC Public Meeting, Statements of Christine V. Walters, MAS, JD, SPHR, Society for Human Resource Management and Pamela Quigley Devata, Esq. Seyfarth Shaw, LLP (October 20, 2010), available at

11 Society for Human Resource Management, Background Checking: Conducting Credit Background Checks (Jan. 22, 2010), available at

12 EEOC Public Meeting, Statements of Christine V. Walters, MAS, JD, SPHR, Society for Human Resource Management (October 20, 2010), available at

13 Id. 

14 EEOC Public Meeting, Employer Use of Credit History as a Screening Tool (October 20, 2010), available at

15 Steven Greenhouse, E.E.O.C. Sues Kaplan Over Hiring, The New York Times, December 21, 2010 (EEOC Spokeswoman, Justine Lisser, said that “99,000 charges were filed with the E.E.O.C. in its most recent fiscal year, but the agency filed just 250 lawsuits that year, usually in what it saw as especially strong or significant cases”). Another case recently filed by the EEOC alleged that a company’s practice of rejecting job applicants based on their credit history and various types of criminal charges or convictions had an unlawful discriminatory impact because of race, national origin, and sex and was neither job-related nor justified by business necessity. See, EEOC v. Freeman Cos., D. Md., No. 09-CV-02573, filed September 30, 2009. 

16 EEOC v. Kaplan, Civil Action No. 1:10-cv-02882 (N.D.OH December 21, 2010). 

17 Steven Greenhouse, E.E.O.C. Sues Kaplan Over Hiring, The New York Times (December 21, 2010). 

18 EEOC Press Release, EEOC Files Nationwide Hiring Discrimination Lawsuit Against Kaplan Higher Education Corp, (December 21, 2010). 

19 42 U.S.C. Sec.’s2000e-2(k)(1)(A)(ii) & (k)(1)(C); Griggs v. Duke Power Co., 401 U.S. 424, 431 (1971). 

20 Id. (“[g]ood intent or absence of discriminatory intent does not redeem employment procedures or testing mechanisms that operate as a built-in headwinds for minority groups and are unrelated to measuring job capability”) 401 U.S. at 432. 

21 EEOC Public Meeting, Statement of Chi Chi Wu, Esq. National Consumer Law Center (October 20, 2010) and Sarah Crawford, Esq. Lawyers Committee for Civil Rights Under Law, available at (These groups have higher rates of unemployment and foreclosure and are disproportionately affected by predatory credit practices and negative health outcomes)(citing multiple studies and reports). 

22 Steven Greenhouse, E.E.O.C. Sues Kaplan Over Hiring, The New York Times (December 21, 2010). 

23 Id. 

24 Id.

25 EEOC Public Meeting, Statement of Michael Aamodt, Ph.D., Principal Consultant DCI Consulting Group, Inc, (October, 20, 2010). 

26 EEOC Public Meeting, Statement Chi Chi Wu, Esq. National Consumer Law Center and Sarah Crawford, Esq. Lawyers Committee for Civil Rights Under Law (October 20, 2010), available at

27 Griggs v. Duke Power Co., 401 U.S. 424, 431 (1971). 

28 15 U.S.C. Sec. 1681b(b). 

29 Hawaii Rev. Stat. Sec. 238.1, Wash. Rev. Code Sec. 19.182.020, Or. Rev. Stat. Sec. 659A, Ill Pub. 96-1426. 

30 Congressional Record - Senate Proceedings, Page S3106 (May 4, 2010). 

31 Seyfarth Shaw One Minute Memo, Additional Federal Legislation Introduced to Ban Employers’ Use of Credit, (May 7, 2010). If this federal legislation is passed it would prohibit the use, subject to the identified exceptions, of an earlier bankruptcy filing despite the Third circuit’s recent ruling in Rea v. Federal Investors, No. 10-1440 (3d Cir. Dec. 15, 2010) (which held that Section 525 of the Bankruptcy Code, which prohibits a private employer from relying on bankruptcy filings to make adverse personnel decisions concerning an incumbent employee, does not apply to applicants in the hiring process). 

32 Les Rosen & Thomas Ahearn, Federal Bill Seeks to Ban Credit Report Checks for Most Employment Screening, Employment Screening Resources (May 12, 2010).