From the title alone some readers might have a visceral response that this article is going to be another liberal rant about the need for bigger government and more regulation. It’s not, so keep reading.
There is no understanding of how many employers use credit histories in their hiring process. Consumers are afraid of the background check and employers are sold the use of credit reports as part of that process by credit bureaus. The only parties that benefit from the continued use of credit reports in hiring are ignorance and credit bureaus.
The elephant in the room when it comes to using credit history is there is no correlation or study showing the definitive relationship between a poor credit history and poor work performance. So what is the benefit of a credit report when hiring other than tossing in a potential bias between applicants?
In this environment of difficult financial times people who have been left laid off and struggling. They’ve suffered credit impacts. Those negative hits have landed not because of laziness or personal irresponsibility, but because of a unique time in our economic history. The credit hits were unintended consequences, not intentional events.
Now that we have a large and growing class of employable people who have suffered credit history blimps, does the continued use of credit history to screen employees make it valuable or discriminatory?
In a recent article, Chi Chi Wu, a staff attorney at the National Consumer Law Center said, “A simple reason to oppose the use of credit history for job applications is the sheer, profound absurdity of the practice. Using credit history creates a grotesque conundrum. Simply put, a worker who loses her job is likely to fall behind on paying her bills due to lack of income. With the increasing use of credit reports, this worker now finds herself shut out of the job market because she’s behind on her bills. This phenomenon has created concerns that the unemployed and debt-ridden could form a luckless class.” – Source
The U.S. Equal Employment Opportunity Commission recently held a public meeting on “Employer Use of Credit History as a Screening Tool.” As part of that presentation specific testimony was presented if credit history was a valid predictor of job performance. Here is the testimony of Chi Chi Wu on that subject.
Credit reports were designed to predict the likelihood that a consumer will make payments on a loan, not whether he would steal or behave irresponsibly in the workplace. There is no evidence showing that people with weak credit are more likely to be bad employees or to steal from their bosses. The most significant study on this issue, presented to the American Psychological Association in 2003, concluded there is no correlation between credit history and an employee’s job performance. 24
Even TransUnion’s representative on this issue, Eric Rosenberg, admitted at a legislative hearing in Oregon: “At this point we don’t have any research to show any statistical correlation between what’s in somebody’s credit report and their job performance or their likelihood to commit fraud.” 25 This is significant, as TransUnion has been the credit bureau that has led efforts against legislation restricting the use of credit reports in a number of states. 26
Promoters of the use of credit histories in employment have tried to link credit history to job performance by citing an Association of Certified Fraud Examiners report noting that two warning signs exhibited by some fraudsters were living beyond their financial means or experiencing financial difficulties. 27 However, while some fraudsters may have had financial difficulties, it is a far cry to say that any worker with financial difficulties has a propensity to be a thief. This conclusion would imply that 25% of American workers are likely thieves. Note that the same study found that men are responsible for twice as much in fraud losses than women; that fraud from workers over 50 resulted in losses twice as high as fraud by younger workers; and another significant warning sign for fraud is divorce. Yet no one is suggesting screening out men, older workers, or divorced workers because they are supposedly prone to committing theft.
Furthermore, some of the most frequent users of credit checks in employment, such as healthcare/social service providers (18%) and manufacturing (11%), are not industries that handle large amounts of cash. 28 Why would employers need to check the credit histories of day care workers, administrative assistants, information technology workers, and nurses? Yet these are all jobs for which some employers have required credit checks. 29
Opponents of restrictions on credit checks in employment also use a “sloppy credit, sloppy person” hypothesis to support the practice, arguing that a financial history is a good measure of an applicant’s organization and responsibility. As one executive at an employment firm argued “[i]f you cannot organize your finances, how are you going to responsibly organize yourself for a company?” 30 The flaw in this hypothesis is that many people end up with a negative credit history for reasons they can’t control. A consumer’s financial problems reflected on a credit report may stem from, not irresponsibility, but because of a layoff, divorce, identity theft, or medical bills. A well known Harvard study found that medical reasons cause about half of all bankruptcies in the U.S. 31
Indeed, medical debt is a good example of why credit reports have nothing to do whether a worker is responsible or honest. Millions of Americans struggle with overwhelming medical debts because they do not have health insurance, or even when they have insurance. According to the Commonwealth Fund, medical debt plagued nearly 72 million working age adults in 2007. 32 Of those consumers, 28 million were contacted by a debt collector for unpaid medical bills, and thus had the potential of having their credit histories damaged.
Medical debt usually appears on a credit report as an entry by a debt collection agency, not by a hospital or healthcare provider. It is sometimes not readily identifiable as medical debt, especially given the FCRA’s requirements to mask the identity of medically-related furnishers of information. 33
These medical debt collection entries have an enormous and negative impact on the credit reports of American workers. The healthcare industry is the single biggest customer of the debt collection industry, constituting 42% of the collection market, versus only 29% for the banking & finance sector. 34 One stunning statistic from a 2003 Federal Reserve study is that over half of accounts reported by debt collectors and nearly one-fifth of lawsuits that show up as negative items on credit reports are for medical debts. 35 Moreover, often medical debts are sent to debt collectors for reasons completely out of the consumer’s control, such as disputes between insurance companies and providers, or even the result of the provider’s failure to properly bill the insurer. These problems can ruin a credit record; they should not be permitted to ruin a worker’s chances of employment. – Source
The use of credit reports is not always potentially discriminatory though and the testimony of Michael Aamodt, Ph.D. at the same hearing pointed out reasons why credit reports are used in employment.
- The organization is required by an external agency (e.g., a bonding company, a state government) to conduct credit checks. Thus, the employer is not using the credit check as a means to predict performance, but instead, as a means to fulfill a requirement by the bonding agency.
- To reduce potential legal liability due to negligent hiring.
- A belief that employees who are in financial distress might have an increased likelihood to steal or accept bribes. This is a common reason stated by law enforcement agencies for why they include a credit check as part of a comprehensive background investigation. I am not aware of any research on this topic that would support or refute this belief.
- A bad credit history suggests that the applicant is irresponsible and is not conscientious and thus will be a bad employee. Employers relying on this belief are in essence, using a credit check to replace or enhance a personality inventory.
- Employees with financial problems will be stressed due to the financial burden and thus will perform more poorly at work. There is some empirical support for this argument as meta-analyses have demonstrated statistically significant, but small, relationships between stress and work performance (p = -.13; Podsakoff, LePine, & LePine, 2007) and stress and organizational citizenship behaviors (p = -.16; Chang, Johnson, & Yang, 2007). There has also been research demonstrating that employees under financial stress have lessened job satisfaction (Bailey, Woodiel, Turner, & Young, 1998) and are more likely to miss work and spend work time trying to solve financial problems than are employees without such stress (Bagwell & Kim, 2003; Kim & Garman, 2004; Kim, Sorhaindo, & Garman, 2006). – Source
Of the issues he raised, none seem compelling. Even the argument that governments or outside agencies require them can be dismissed by saying those groups have also bought into the Kool-Aid that credit history is a determination of much of anything. Given the needs stated above, a criminal background check would be more relevant.
Even in an environment where security and a strident effort is made to screen candidates from sensitive positions with security clearances, the U.S. military has said that taking action, like filing bankruptcy, which may impact your credit, is a more prudent and responsible action to take.
The amount of your unpaid debts, by itself, may jeopardize your clearance, even if you don’t file bankruptcy. In that sense, not filing for bankruptcy may make you more of a security risk due to the size of your outstanding debts. By the same token, using a government-approved means of dealing with your debts may actually be viewed as an indication of financial responsibility. Eliminating your debts through bankruptcy may make you less of a security risk. – Source
The use of credit histories to determine employment in difficult economic times does seem to be a potential basis for hiring discrimination. Even the Society for Human Resource Management (SHRM) doesn’t seem to buy in to the practice. Attorney Christine Walters for SHRM said, “To be clear, we believe that employment decisions should be made on the basis of an individual’s qualifications – such as education, training, professional experience, demonstrated competence – and not on factors that have no bearing on one’s ability to perform job-related duties.” – Source
If employers use consumer credit reports in the hiring process, ultimately the only entity that wins is the credit bureaus from selling credit reports. Employers lose by missing out hiring a great worker and employees lose by not getting a good job when they need it most. Most compelling of all is the fact the the reliance on credit history in hiring is based on assumptions, rather than fact.