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Federal Laws for Credit Checks

The Fair Credit Reporting Act of 1971 regulates the use of consumer credit reports as a part of background checks on applicants. Hiring is a permissible purpose to do a credit check under the law, but you must keep the results confidential and must not put the results of the check in the person's personnel file.

The Fair and Accurate Credit Transactions Act requires employers to destroy all papers or electronic files or media containing personal information derived from a consumer report before it is discarded.

Bankruptcy. If the credit report shows that the person declared bankruptcy, then you also have to comply with provisions of the federal Bankruptcy Act. Under the Bankruptcy Act, you may not discriminate against an applicant solely because a credit check reveals that an applicant has sought protection under the Bankruptcy Act, been insolvent before seeking protection under the Act, and not paid a debt that is dischargeable under the Act. In other words, bankruptcy is not a valid reason to deny employment.

Disclosures You Must Make

You must:

  • Clearly and accurately tell the applicant that an investigative consumer credit report may be made that could include information on the individual's character, reputation, personal characteristics, or mode of living.
  • Make the disclosure in writing, on a separate piece of paper (not as part of your job application). Your credit reporting agency can provide you with forms to be used for this purpose.
  • Mail or otherwise deliver the notice to the individual not later than three days after the date on which the report was requested.
  • Include with the disclosure a statement informing the applicant of his or her rights to request disclosure of the nature and scope of the investigation required.
  • Have the applicant sign the disclosure document and return it to you. Be sure to keep this in your files.
  • If requested by the individual, make a complete and accurate disclosure of the nature and scope of the information sought not later than five days after the date on which the individual made the request, or five days after the investigative report was requested, whichever is later.

Business Tools

A sample Fair Credit Disclosure Act notice appears in the Business Tools area.

If you do deny employment because of something on the credit report (and remember, it must be something other than bankruptcy), you must:

  • inform the job applicant that employment was denied because of the credit report investigation, even if the credit report wasn't the only reason
  • furnish the individual with a copy of the credit report, along with a summary of the individual's credit rights.

The Federal Trade Commission is very specific regarding the format of the consumer credit rights notice that must be provided to an employee or applicant if adverse action is contemplated. Fortunately, federal law requires credit reporting agencies to provide a copy of this notice with each credit report. You can use this notice to fulfill your own notification responsibilities.

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