When it comes to pre-employment background screening, credit reports are one of the most misunderstood screening options available. While some employers want to run credit reports on all of their applicants, many employers treat the use of this important tool with due respect and only request credit reports on applicants when there is a legitimate reason for obtaining their credit history.

Obviously employers have a right to screen applicants when hiring. There are many legitimate reasons for pre-employment credit reports, including reducing the employer’s potential liability due to negligent hiring, limiting the potential for theft, embezzlement, and workplace fraud; and to assess overall reliability, character, and trustworthiness.

With the current economic downturn and mortgage crisis, thousands of formerly qualified applicants are finding that they are “un-hirable” because their credit history is in shambles.

For example, losing your home through foreclosure is essentially defaulting on a major loan. It is thus treated as such and will impact one’s credit score. In addition, bankruptcy has a negative impact on one’s credit worthiness, and will also lower an overall credit score. Lastly, unexpected unemployment, often forcing consumers to rely on credit cards to make ends meet, can have a major impact on one’s credit. Opening numerous cards in a short period of time and missing even a few payments will also lower one’s credit score; however, there lies the key phrase: “credit score.”

Many consumers and applicants have the incorrect belief that when a potential employer runs their credit, it will “ding” their credit. This is correct for normal credit inquiries, such as when applying for a home or auto loan. An inquiry is made by the potential financing company to determine the buyer’s credit score (often called FICO score). Too many of these types of inquires will eventually lower a consumer’s credit score, but employers (and their 3rd party Credit Reporting Agencies) do not run credit reports on applicants that include scores. They instead run what is known as a “pre-employment credit check,” which does not contain a credit score at all, and only contains information about a consumer’s credit accounts such as the names of the accounts (i.e. the issuing bank or store), each account’s details (whether it is current or has a history of late payments, accounts in collections), and public records associated with the consumer (i.e. tax liens, civil judgments, collections, etc.). It also identifies each account as installment or revolving, and gives an indication of the total indebtedness of a consumer.

We feel that educating employers and consumers on how credit reports can be used successfully in employment screening will lead to fewer instances of discriminatory hiring claims. Pre-employment credit reports should be utilized judiciously and only when the applicant’s credit history has a direct correlation to the type of job in which they are applying.