What Is the Fair Credit Reporting Act?

Before hiring a new employee, employers typically run background checks, or consumer reports, on the individual. The consumer report can reveal information like the applicant’s criminal and public records, as well as their credit report.

But before looking into an individual’s credit, you need to know about the Fair Credit Reporting Act. What is the Fair Credit Reporting Act?   

What is the purpose of the Fair Credit Reporting Act?

The Fair Credit Reporting Act, or FCRA, was established in 1970 as a way to protect consumer credit information.

Credit reporting agencies (CRAs) maintain credit files for each consumer. An example of a CRA is a credit bureau. The FCRA prevents parties from accessing and passing around the information stored in a CRA without first getting permission from the consumer.

What is the purpose of the fair credit reporting act? The FCRA purpose is to protect a consumer’s rights and privacy.

How does the Fair Credit Reporting Act protect consumer rights?

Here’s a rundown of the different ways the FCRA protects consumer rights:

  • Consumers have the right to know what is in their file
  • Consumers must be told if information is used against them
  • Consumers can request credit scores (for free or for a fee)
  • If there is inaccurate information, consumers can fight it
  • Agencies are required to update information in a consumer’s file
  • Not just anyone can access a consumer’s file
  • Consumers must give permission to employers who want information

Now that you know a consumer’s rights under the Fair Credit Reporting Act, you need to comply with the rules.

Who regulates credit reporting agencies?

The Fair Credit Reporting Act is enforced by the Federal Trade Commission (FTC). The FTC makes sure that CRAs do not violate the rules of the FCRA.

The Consumer Financial Protection Bureau also supervises credit reporting agencies to make sure consumers’ rights are protected.

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FCRA compliance

Background checks can show you whether a candidate is safe to work in your business, how they handle their personal finances, and more. Generally, employers conduct background checks when they are very interested in a candidate, right before they offer the job.

You work with a third party to collect information about the candidate. The agency that conducts the consumer report can collect information from government agencies and credit bureaus.

A credit check can show you whether the candidate is responsible and timely with their personal obligations. The credit report shows you the amount of credit a consumer is using and if they are late with their payments. You can use this information, along with other factors, to judge whether a candidate is fit to work at your business.

As an employer, you do have the right to obtain information about an employee’s or potential employee’s background under the FCRA, if you follow credit reporting laws.

To comply with the FCRA, you must provide a notice to the candidate saying you need a consumer report on them. Your notice should be a stand-alone document, and it should tell the candidate that you might use the information to make a decision about hiring them. You can also add a clear disclaimer asking candidates for the right to obtain reports throughout their employment at your business.

After the candidate has read and agreed to your disclosure, they need to give you written permission to access their records.

Once you have the candidate’s written permission, you need to officially tell the company obtaining the consumer report that you followed the FCRA regulations.

When the company obtaining the consumer report gives you the report, they will also give you a copy of “A Summary of Your Rights Under the Fair Credit Reporting Act,” a document that lays out the rights of the consumer.

If you are thinking about rejecting a candidate application or firing an employee because of their consumer report, give them a formal notice. Include a copy of the consumer report and “A Summary of Your Rights Under the Fair Credit Reporting Act.” The candidate can then look over these documents and verify whether the information is correct or not.

If you decide not to hire the candidate, give them information about the company that conducted the consumer report, a statement saying the CRA did not make the decision, and a notice that they can fight the information if it’s incorrect.

Regardless of whether you hire or don’t hire the candidate, you are responsible for safely disposing of the consumer report (e.g., shredding).

For more information on your employer requirements related to FCRA compliant, visit the FTC’s website.

Some states have further laws that limit or prevent you from using an individual’s credit history as a factor in whether they should be hired or not. For example, you cannot base whether you hire someone on their credit report for most positions in California. Check with your state for credit report laws and regulations.

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This article has been updated from its original publish date of September 13, 2012.

This is not intended as legal advice; for more information, please click here.

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