What is a credit check?

A credit check is a way for you to check a job candidate’s history to determine if they are the right applicant for the position you are hiring. Checking an employee’s credit is more common in certain industries where the applicant will work with money, such as banking or finance. It is also mandatory for any employee who intends to work for the federal government.

The two most common companies used in Canada for credit checks are Equifax and TransUnion. A credit check should be the last part of the hiring process. The credit check process should only occur after you send a conditional offer to a candidate.

What can employers see with a credit check?

A full credit check shows you the in-depth history of a candidate’s financial history. Some information you will be able to see when performing a credit check include:

• When the individual opened the accounts
• Credit limit overages
• Any missed loan payments
• The total amount the individual owes on outstanding loans
• Any credit available to the applicant
• Any closed chequing or savings accounts
• Any registered items such as liens made on cars or homes
• Payments made on time or missed
• Any debt that is currently with creditors or collection agencies
• Bankruptcy
• Court decisions made against an application

An employer credit check will keep some applicant information private. For example, you will not be able to see the prospective employee’s credit score or birthdate.

How employment credit checks work

Employers use background credit checks to determine if the candidate they are reviewing is right for the role. For example, you may find the individual has bad credit or evidence of poor money management. If so, you may want to reconsider them for the role of a financial manager, portfolio manager, accounting manager, or other similar finance positions.

Before performing a credit check, it is important that the candidate fully understands what you will check and why. You can notify them that you plan to pull their information and how you intend to use it. Once you inform them, you can check their credit history. During this process, you or another professional at your organization can request an employee credit check through a third-party company, such as Equifax or TransUnion. These companies pull the employee’s information and send it securely to you or your team.

Benefits of checking an employee’s credit

You may want to run a credit check on a potential employee to minimize risk for your organization, especially if the individual works with money. A credit check is typically one part of a longer background check, and it can help employers learn more about their applicants. Another reason to check the credit history of an individual is to help prevent fraud or money laundering. A credit report can help show you the employee’s finances, which could help you select a candidate with strong financial skills and knowledge.

It’s important to consider that it isn’t just the finance or accounting department that can access company finances. Professionals in other departments, such as those who work with computer security, may be able to access important financial documents too.

Drawbacks of checking an employee’s credit

While there may be a few reasons you’d want to run a credit check on potential employees, there are more reasons why you shouldn’t. Some of these reasons include:

Company personnel not properly trained

Many human resources employees or recruiters are not trained in understanding and analyzing the data they pull from credit checks. While they can see numbers and outstanding red flags, they might not know how to interpret the data adequately, making the report ineffective.

Information may not be correct

Not all credit checks are kept completely up to date. There may be times when a candidate pays off bad credit or corrects a lien on their property, but the credit system might not reflect this change immediately. Also, a credit company may occasionally have inaccurate information from a fraudulent account or an error.

Invasion of privacy

While credit checks may be more common in certain industries, such as banking or accounting, credit checks are still fairly new in Canada. Some people may not know that employers have the authority to do this. If communication about the credit check and information you will review is not clear, a candidate could interpret it as an invasion of privacy. Some professionals may also prefer to keep their personal financial records private and may not feel comfortable sharing all of this data with a new employer.

Information may not predict performance

Credit reports may not necessarily predict a candidate’s success. A credit check will show you the employee’s credit history, but this might not be an effective way to measure their financial skills. An employee with negative marks on their credit report might have a valid reason or explanation, and they may still be able to safely manage your finances.

Relevant laws employers should be aware of

Before performing a credit check on a potential employee, it is imperative to understand the laws associated with it. First and foremost, the Personal Information Protection and Electronic Documents Act (PIPEDA) has extensive information about what information you can and cannot collect or store about your employees. Be sure to work with a lawyer when drafting an offer letter template to ensure this information is clear and documented.

Also, if you intend on using credit checks, train your HR staff on the importance of protecting sensitive information and what the system records. Any information collected from a background check needs to be stored and protected appropriately.

If you find negative information after performing a background check on a prospective employee, it is important that you not discriminate against them in any way. If you choose to rescind an offer letter because of a credit check, you will need to have thorough research and reasoning. This will help that you avoid any potential lawsuits.

Above all, you should only use information in the way you disclosed when you notified the employee you planned to perform a credit check. After you’ve reviewed the data, you must securely delete all information from your system. If you choose to perform a credit check for employment, make sure you follow the current Canadian rules and laws.