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The right way to pull a credit report

Credit reports can help screen job and credit applicants, evaluate an employee for advancement or reveal if a vendor is reliable. But be careful. As with most issues involving financial data, there are strict rules for inquiring companies.

The Fair Credit Reporting Act lays down the law for delving into the monetary matters of others. The federal statute allows a business in certain situations to legitimately pull a credit report for an individual or a business. But the FCRA establishes a procedure that must be followed, especially when dealing with information on an individual.

And states may have additional rules or regulations. Tor Matheson, managing partner of Old Republic Credit Services, a credit bureau based in Monterey, Calif., points out that his state has particularly stringent rules about when and how a small business can pull someone's credit report.

Ask first
One rule to always heed: Obtain permission before pulling a credit report.

This is true whether you're looking into a business or an individual's record. When it comes to checking on individuals, you must get the go-ahead from not only job applicants, but also from current employees you're checking on in connection with a promotion or other job change.

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In the case of an employee or potential hire, the FCRA demands that your company explain that it intends to get a credit report and that the individual's acquiescence must be on record. Usually the permission is in writing, but recorded oral authorization or an electronic signature on a permission form will also work, says David Zugheri, president and CEO of First Houston Home Mortgage.

If an employee gave you permission in the past, your company need only ensure that the employee receives or has received a "separate document" notice that spells out that reports may be obtained during the course of employment.

You also must give the individual a copy of "A Summary of Your Rights Under the Fair Credit Reporting Act." This document should be available from the credit-reporting agency you use.

And if your company ends up not hiring someone because of information contained in a credit report, you must notify the individual and supply the following information:

  • The name, address, and phone number of the company that supplied the credit report.
  • A statement that the company that supplied you with the credit report did not make the decision and cannot give reasons for it.
  • A notice of the individual's right to dispute the accuracy or completeness of any information the agency furnished and his or her right to an additional free consumer report from the agency upon request and within 60 days.

These employer obligations were added as amendments in 1997 to the FCRA. Failure to comply can result in lawsuits waged both by the individual as well as federal agencies and state governments.

Where to search
Once you've gotten permission to run the check, where do you turn for the data?

It usually makes more sense for a small company looking into an individual's creditworthiness to go to a local or regional credit bureau. That's because the big three in credit reporting -- Equifax, Experian and TransUnion -- all charge top dollar. General Motors might be able to afford them, but your small company probably won't be able to.

"If you're FedEx with thousands of employees, that's one thing," Old Republic Credit Services' Matheson says. "If you're a small service company with 25 employees that hires one employee every six months, you could be looking at spending $1,000 for one report."

In other words, credit reports are a volume business. If you're head of a large Fortune 500 concern, the price per report drops. Or, your company may be so large that it has a department that performs credit checks.

If you're a small business, you need to head elsewhere to get useful -- and affordable -- information.

Zugheri recommends Credit Bureau Services or First American Credco. He estimates that they'll charge anywhere from $15 to $60.

To find other credit report sources, do an Internet search. A quick look at the Web turned up CreditReport.com, which uses information from Experian, Equifax and TransUnion and charges $13 for a report based on one of the "Big Three" or $28.95 for a three-in-one report that compiles information from all three vendors.

You also can ask your fellow small-business owners which companies they use. Other professionals that your company employs, such as your lawyer or accountant, also may have recommendations.

Checking out the corporate clientele
If you're investigating another company that you hope to snare as a customer or use as a vendor, you'll need to go to Dun & Bradstreet, the company that has a lock on business information.

A company can pay up to $300 for a report on a business, Zugheri says. That's the high end. D&B's Web site says its prices start at $19.99.

Although Dun & Bradstreet is pretty much the only business-credit-report show in town, not all credit experts recommend them. Critics charge that the D&B reports are based primarily on information submitted by the company being profiled. D&B's Web site, however, cites use of impartial third-party and government information in addition to self-reported data from companies.

If the expense or lack of verifiable information bothers you, there are other ways to ensure that your company gets paid, Matheson says. You can require a personal guaranty before selling goods.

Two other options worth considering: trade references and a bank reference.

If you go the reference route, first call the bank and ask about the credit applicant's credit rating, how long the company's had its account with the bank, what its average balance has been and whether the bank has credit experience with this account, and if it has, was it good or bad?

Similarly, call up two or three trade references and ask them how the company in question has been about paying its bills.

Checking references and reading credit reports can answer a lot of questions about whether your company should hire someone or extend credit to a new client.

Jenny C. McCune is a contributing editor based in Montana.

-- Posted: Sept. 11, 2002

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See Also
Safeguarding customer privacy
An Internet usage policy can protect your company
Should you log employee keystrokes?
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