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What Employers Need To Know About FCRA Credit Check Requirements

Hiring managers must abide by government regulations to make decisions. Being aware of these regulations helps keep your business out of legal trouble. Businesses that focus on staying within these regulations help foster a nurturing environment for candidates and employees, and one of the most important rules is FCRA requirements.

Here are the ins and outs of FCRA background checks.

What is the Fair Credit Reporting Act

The Fair Credit Reporting Act, also known as FCRA, was initially mandated in the 1970s, shortly after the advent of standardized credit scores. FCRA requirements are centered on how businesses obtain candidate credit reports, how businesses use said reports, and if and when businesses can share the information from the reports with other organizations, such as background check companies. Beyond that, FCRA also works to prevent unfair hiring/firing practices around credit reporting and to ensure the accuracy of credit reports. 

What does the FCRA Protect

FCRA requirements protect candidates and employees from discriminatory and biased hiring practices. For example, FCRA prevents employers from viewing medical records in most cases. Additionally, employers must follow guidelines to request a credit report. It’s also worth noting that employers must reveal what part of a report they used to decline a candidate for hiring, promotion, etc. And lastly, employers must share information gathered from a report with employees and candidates upon request. 

FCRA background checks also protect employers. As a significant part of FCRA requirements is to ensure accuracy and fairness in the hiring process, employers abiding by these rules have a better chance of obtaining relevant data to make an informed hiring decision. For example, the chances of you hiring or passing on an employee based on incorrect credit report data is significantly less. 

How Does the FCRA Affect Credit Check Requirements

Here are a few ways FCRA requirements impact credit checks.

Credit Freeze: Anyone can freeze their credit, thus preventing it from being pulled, by contacting the major credit bureaus. In this case, employers must get additional permission via a one-time access code to lift the freeze and provide a credit report. 

Credit Report Authorization: Even without a credit freeze, employers must get express permission from candidates to have their credit pulled. Typically, this permission is obtained through a signed form. 

Transparency: As mentioned, FCRA requirements mandate total transparency in hiring decisions based on credit pulls. Employers must reveal what information they use and how it impacts their hiring choice.

Appeal: FCRA requirements include an option for an appeal if a candidate or employee believes the decision was made on inaccurate information. As an easy example, an employer may decline a hire for a role if their credit score is too low. This scenario can happen in banking and high-level financial roles. However, if the credit score an employer pulls is inaccurate, a candidate can appeal the decision and provide information to counteract the error.

How Does the FCRA Affect Background Checks

FCRA-compliant background checks center around asking for consent before running a history report. Granted, this rule only applies when anyone other than the business conducts a background check. A 3rd party background check, like those provided by KarmaCheck, requires permission from the employee or candidate. 

Running a background check without consent, even in scenarios where it’s legal, isn’t the best business model and can instill an air of distrust among employees. So, with that in mind, employers should always ask before running a background check. And for clarification, a credit report background check always requires permission.

How to Avoid FCRA Violations

Avoid FCRA violations by adhering to all regulations. Here are the most common ones to be aware of.

Permission: An employer must ask permission before obtaining a credit report. The consent form must be a standalone document; it can’t be tacked onto the job application or other forms. Essentially, you must limit any chance a candidate may sign the permission form without realizing precisely what it’s for. 

Reason for Denial: If you pull a credit report and find red flags, you must disclose these reasons to the employee and give them a chance to appeal or explain before you make an official decision. Additionally, you must provide a copy of the credit report.

Chance for Appeal: An applicant can appeal a denial based on credit information. However, as an employer, you must make that option clear to them and provide the steps to complete it. 

State Laws: States may have additional FCRA requirements that a business must adhere to. For example, Fair Chance Hiring practices prevent employers from inquiring about criminal records until an official job offer has been made. As a hiring manager, you must stay current on state regulations regarding fair chance practices and other hiring mandates. Visit your state’s labor laws website often to achieve continued understanding.

The Takeaway

FCRA requirements are essential to the hiring process, and adhering to them protects employees and candidates from unfair practices. And, by proxy, it prevents businesses from damaging their reputation by unintentionally disqualifying a candidate based on wrong information. Thankfully, you can streamline the process by doing two things. First, consult with your legal department to ensure permission forms for background checks and credit reporting checks are current. And secondly, leverage KarmaCheck to provide trustworthy, relevant info for all background checks. Improve your hiring process by getting started with KarmaCheck!


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