Background checks have long been a standard part of many hiring processes, providing employers with insights beyond interviews and resumes. However, the inclusion of credit information in these screenings has become a contentious issue as concerns over fairness and discrimination grow. Recently, New York joined a growing list of states that restrict employers from using individuals’ credit reports when making employment-related decisions such as hiring or promotions, with certain job-specific exceptions.
Set to take effect on April 18, New York's legislation is now the 11th statewide law designed to limit how employers employ credit history in evaluating candidates. Other states with comparable, though not identical, statutes include California, Colorado, Connecticut, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont, and Washington. On a more localized level, several cities and counties—namely New York City, the District of Columbia, Chicago, Madison in Wisconsin, Philadelphia, and Cook County in Illinois—have adopted similar restrictions.
One notable aspect of the New York law is its broad potential reach. According to attorney Stephen Fuchs, a shareholder at the employer-side Law firm Littler Mendelson, the statute could apply beyond New York's geographic borders. He explains that candidates residing in New York who apply for roles in other states might still benefit from this protection if employers obtain their credit history for employment evaluation purposes.
This nationwide implication is particularly pertinent as nationally operating businesses often seek consistency in their hiring protocols. In fact, many employers across states with and without credit report restrictions are reconsidering the necessity of credit checks altogether. Fuchs points out that some companies have opted to eliminate credit history screenings, questioning the value and relevance of this information in hiring decisions.
Nevertheless, credit reports remain permissible for review in specific categories of employment, even within states that restrict their general use. These exceptions typically encompass positions in law enforcement, roles granting access to intelligence or national security data, and jobs with fiduciary responsibilities, such as those handling company funds or sensitive trade secrets.
Within sectors like securities and financial services, the use of credit reports for candidate evaluation is often allowed, especially for positions regulated by financial authorities. The rationale behind this practice hinges on concerns that candidates with poor credit or significant debt may pose an increased risk of misconduct such as theft, embezzlement, or fraud, though these correlations are subject to debate.
When it comes to what employers look for in a credit report, there is no universal threshold or checklist of concerning items. Melissa Sorenson, executive director of the Professional Background Screening Association, notes that organizations tend to focus on the volume and recentness of negative financial information.
Specific red flags that might raise concerns include accounts that are severely overdue, sent to collections, or written off. Rima Hopkins, an HR knowledge adviser at the Society for Human Resource Management (SHRM), explains that these items can indicate financial distress or ineffective debt management, which could be especially relevant for positions involving fiduciary duties, financial access, or sensitive data handling.
However, employers must navigate strict procedural safeguards designed to protect candidates. Before any adverse hiring decision due to credit information, candidates must be given the chance to review and respond to the findings. Furthermore, employers are encouraged to ensure that any concerns tied to credit history directly relate to legitimate business necessities and not applied in an overly broad or discriminatory manner.
Notably, certain types of debt, like medical bills or student loans, typically carry less weight in employment considerations—especially if these financial obligations are unrelated to the job's nature.
For job seekers, understanding this framework is essential. Employers cannot legally conduct background checks, including credit inquiries, without obtaining the candidate’s written permission. These checks generally occur only after a job offer is extended. Prospective employees are advised to proactively review their own credit reports from the three major bureaus—available for free annually via annualcreditreport.com—to verify accuracy and identify potential issues.
If legitimate credit problems exist, transparency can be a valuable approach. Sorenson suggests that candidates be upfront with employers about negative credit history and the circumstances surrounding it, which may help contextualize the information.
Federal law, specifically the Fair Credit Reporting Act (FCRA), grants individuals certain protections related to pre-employment background checks. For example, employers must provide candidates a copy of their credit report before making a final hiring decision based on its contents, allowing candidates the opportunity to dispute inaccuracies or incomplete information with the screening company.
Beyond federal regulations, state laws can offer additional protections, such as permitting candidates to access the background report that employers obtain during the hiring process when they sign consent forms. Being aware of the legal landscape within one’s state is important, as this knowledge empowers candidates and helps ensure fair treatment in the employment process.