Best Practices in Credit Check: What you should look out for?

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Credit check ensures the prospective employee is stable financially and is responsible for managing his/her own finances. Employers are increasingly employing credit checks as part of employee screening services to protect the company from financial mismanagement. Credit check provides an insight into the likelihood of the candidate indulging in fraud or crime such as misappropriation of funds. According to a survey by the Society of Human Resources Management (SHRM), 60% of employers obtain credit reports on applicants for some or all positions. Job roles such as banking, accounting, and senior executive positions where financial transactions are involved are highly vulnerable to fraud. A credit check is a brilliant tool that can assess how reliable the candidate is.


Credit check: What does it verify?

 Credit check as part of employee screening services includes checking the debts of the candidate with respect to debit or credit cards, loans such as for a car or home, payment history, default history, or delayed payment details. Credit check also involves checking the identity of the candidate including address, name, Aadhaar number, and eKYC. According to the fair credit reporting act in India, the Credit Information Companies (Regulation) Act of 2005 lays down regulations on the use of credit-related information and imposes penalties for alteration or leakage of credit data. In the U.S. the Fair Credit Reporting Act (FCRA) regulates the use of information related to consumer credit cards including the collection and dissemination of the information.


Best practices in credit check:

Proceed with Caution: In India, the credit score can be checked through validated credit scores from CIBIL, Experian, Equifax, and other companies that maintain credit databases. The RBI has set up guidelines with respect to conducting employee verification and background check for banks and avoiding employing those with criminal records. Companies in India that have ISO 27001 certification are also required to carry out employee verification checks before employing. Yet, Article 21 guarantees the right to privacy and there are penalties for misusing credit scores or data of employees. Employers need to ensure the policies of credit check is fair and relevant while also specifying the valid reason for conducting credit check for employment.

Follow employer responsibilities: In the U.S. the FCRA imposes stringent regulations and penalties related to misuse of credit data. Employers are required to give in writing that they will not misuse the credit data and that it has been collected only for employment purposes. It is also mandatory to obtain written consent from the employee for conducting the credit check.

Being ready with adverse action processes: Specific rules have to be followed by the employer if an employer rejects a candidate based on the credit reports. The employer has to provide an explanation for rejection to the employee as well as disclose the credit score obtained.

Giving a pre-adverse action notice: Employers who decide to not employ the candidate based on the credit report have to give pre-adverse notification. Reasonable time has to be given to the employee to respond to the notice. After this time, the adverse action notice has to be given giving the details of the credit checking company that gave the report, the rights of the candidate to dispute the findings, and to ask for a free report from the agency.

Make the right decision: While credit checks can be conducted to see if the candidate is financially stable and does not employ the candidate based on the credit history, firing an employee based on a delinquency report is not permitted under law. In India as well, employers have to tread carefully on using credit information as it may infringe on privacy rights.

Ensure that you conduct credit checks before handing over your company’s financial responsibility to any individual.

Also Read: You cannot Ignore Background Checks- Here’s Why

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