Credit Reports, Credit History, and Credit Scores in Hiring and Job Performance. Is It Even Fair?

You hear all the time how credit history can impact your ability to get a job. In the debt relief world debt settlement and credit counseling companies claim bankruptcy prevents people from getting jobs and that’s why people need to use their services instead. But what is reality and what is the negative impact of alternative interventions like debt settlement in hiring decisions as well?

First we must look at the use of credit reports in hiring. Let’s start with the elephant in the room — There is no proof or evidence that there is any relationship or correlation between job performance and past credit history.

In 2010 the credit reporting bureau TransUnion allegedly made just such an admission at a hearing in Oregon, “… 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.” – Source

At a trade show once I asked a credit bureau executive why they pushed credit reports to employers as part of the job application process, his response was that it helped them to sell more credit reports. If that’s the only reason, that’s unfortunate for job seekers.

The use of credit history is receiving some attention and should get a lot more. The State of Illinois has even passed a law that makes job discrimination based on credit history, illegal.

According to a 2010 poll by the Society for Human Resource Management, 60 percent of surveyed employers conducted credit checks for some or all candidates as part of the hiring process but as you’ll learn the credit history is only a small part of the decision process to employ someone.

But do credit scores even make sense as a tool for exclusion for a job? Not so says a Louisiana State University research study.

Jeremy Bernerth, assistant professor in LSU’s E. J. Ourso College of Business Rucks Department of Management said their study of credit scores found that, “easy-going individuals actually have worse credit scores than disagreeable and rude individuals.”

However, contrary to what many employers consider common knowledge and practice, the researchers found no correlation between poor credit scores and bad behavior on the job.

“It was telling that poor credit scores were not correlated to theft and other deviant types of work behaviors,” said Bernerth. “Most companies attempt to justify the use of credit scores because they think such employees will end up stealing, but our research suggests that might not be the case.”

It appears this widespread practice of employers pulling credit histories can lead to discriminatory practices against otherwise qualified and preferred candidates for jobs.

One such case was brought by the Equal Employment Opportunity Commission (EEOC) against Kaplan Higher Education, Inc. In that ongoing 2010 complaint the EEOC alleged: “Since at least January, 2008 , Defendant has subjected a class of aggrieved Black job applicants and incumbents throughout the United States to an ongoing pattern or practice of discriminatory failure to hire such persons because of their race, Black, in violation of Title VII. In this regard, Defendant has used, and continues to use, a selection criterion for hiring and discharge, namely, credit history information, that has had, and continues to have, a significant disparate impact on Black job applicants and incumbents, is not job-related and consistent with business necessity, and for which there are appropriate, less-discriminatory alternative selection procedures.” – Source

It is logical that some groups of employees may be more susceptible to credit report problems and that could create a pattern of racial or gender discrimination.

In a unique irony, Kaplan discovered that the EEOC, through the Office of Personnel Management, uses background or credit checks in its own hiring of employees. – Source

According to the testimony of an EEOC employee, the credit reports that are utilized by them list “bankruptcy records, court records, consumer credit counseling, child/spousal support records, individual credit account records,” among other things. So apparently credit counseling can make an appearance as well and may have an impact.

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And for people that run into money troubles during their course of employment the EEOC has a policy of no action as long as the employee has been honest about their bad debt problem.

From documentation issued by the government Office of Personnel Management it appears that which credit may be a factor, so are relationships with foreign family members, living arrangements, and sexual behavior.

The OPM guidebook however makes it clear that it is not the presence of credit problems that makes it an issue but the absence of proactive action to resolve the issues.

The guide says the following are examples of disqualifying issues surrounding credit history:

  • Unwillingness to satisfy debts
  • Indebtedness caused by frivolous or irresponsible spending and the absence of any evidence of willingness or intent to pay the debt or establish a realistic plan to pay the debt
  • A history of not meeting financial obligations
  • Consistent spending beyond one’s means, which may be indicated by excessive indebtedness, significant negative cash flow, high debt-to-income ration and/or other financial analysis – Source

What is interesting to note however is that the issues that raise concern above are also addressed and handled with debt relief tools like credit counseling, some debt settlement approaches, and certainly chapter 7 bankruptcy and chapter 13 bankruptcy.

Other Positions on the Use of Credit in Hiring

In 2010 the EEOC held hearings on the employer use of credit history as a screening tool. A number of experts submitted testimony as part of those hearings.

“High unemployment has forced an increasing number of people to enter or re-enter the job market,” said EEOC Chair Jacqueline A. Berrien. “As a result, an ever increasing number of job applicants and workers are being exposed to employment screening tools, such as credit checks, that could unfairly exclude them from job opportunities.”

The Commission heard from a diverse set of experts. Chi Chi Wu of the National Consumer Law Center (NCLC) expressed grave concerns that the use of credit histories is mushrooming at the time of economic instability for many Americans, noting that the use of credit histories “create[s] a fundamental ‘Catch-22’ for job applicants,” especially during this period of high unemployment and high foreclosures, both of which have a negative impact on credit.” She observed, “You can’t re-establish your credit if you can’t get a job, and you can’t get a job if you’ve got bad credit.” This view was echoed by several of the witnesses.

Sarah Crawford of the Lawyers’ Committee for Civil Rights Under Law and Dr. Avis Jones-DeWeever from the National Council of Negro Women, explained that the use of credit histories in the employment context can have a disparate impact on a range of protected groups, including people of color, women, and people with disabilities. While the use of credit checks as employment screens increases, Crawford cited studies that show credit history is a poor predictor of job performance. Additionally, she pointed out that many credit reports are riddled with errors or incomplete information, a view that was echoed by Wu of the NCLC, making whatever predictive value they might have even less reliable.

Representatives from the business community—Michael Eastman of the U.S. Chamber of Commerce, Christine V. Walters of the Society of Human Resources Management (SHRM) and Pamela Quigley Devata of the law firm Seyfarth Shaw, LLP—told the Commission that the use of credit histories is permissible by law, limited in scope, and predictive in certain situations of reliability.

Walters of Society for Human Resource Management said that “13 percent of organizations conduct credit checks on all job candidates … [and] another 47 percent … consider credit history … for select jobs,” but for those employers, “credit histories are but one piece of the puzzle.” It is the experience of SHRM member companies that very few utilize credit histories for every single job opening. Devata asserted that the use of credit histories is driven, in part, by the need for background information on potential employees in a current environment when it is difficult to obtain any but the most basic information in job references.

The Evidence Is That Credit Reports Are Worthless for Hiring

There seems to be more evidence that credit reports and credit histories are not a good guide for determining employment that there are to support it.

In 2003 the American Psychological Association found there is no correlation between credit history and job performance. When we include the statements made by the recent LSU study and even the words of TransUnion’s own representative it seems very compelling that credit reports do unfairly discriminate without any foundation of reality.

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Additionally, there is a vast rate of credit report errors that could impact an employment decision regardless of the actual financial performance of a potential employee. Or even that financial issues might be easily created beyond the control of the individual, such as by unexpected medical bills or other event beyond the control of the person.

But not all companies, nor all positions result in a credit check being performed. According to the Society for Human Resource Management the overwhelming use of credit checks involved positions of fiduciary or financial responsibility.

The same study concluded that most organizations:

  • Do not conduct credit background checks on all job candidates
  • Employers place lower relative importance on credit background checks than other job-related factors in making hiring decisions.
  • Credit background check results are seldom used as a definitive hiring criterion. – SHRM Research Spotlight Credit Background Checks

Even after pulling a credit report and spotting something that drew attention, the study found that only 13% of the time was that an exclusion to employment without allowing the job candidate to have an opportunity to explain the circumstances.

In general the employment history is not the determining factor for employment. Many other factors are more important.

Do You Have a Question You'd Like Help With? Contact Debt Coach Damon Day. Click here to reach Damon.

So Where Does This Leave Us?

Well if you have been one of the people that has potentially lost a job specifically due to your credit report, you are in a tiny minority. Even the military allows does not exclude people from high government security clearances for bankruptcy. – Source

It seems that rather than have a credit report that leaves a trail of debt without resolution, the more prudent course if to take some action to address your debt in a positive fashion that shows you did something to address the issue.

If that action results in comments or entires on your credit report you should be open and honest about the situation and explain the circumstances to make your past credit, little to no factor in deciding to employ you.

Of the three major debt relief tools it would appear that the credit report impact is varied:

  1. Credit Counseling – May be reported on an employment credit report and serves as evidence that some financial concerns existed for the consumer to seek credit counseling assistance. Also impacts credit when included accounts are closed by creditors.
  2. Bankruptcy – Bankruptcy remains to only legal tool that allows consumers to address and discharge their debt. It will be reported on the consumer credit report for seven years if a chapter 13 bankruptcy is filed or ten years of a chapter 7 bankruptcy is filed.
  3. Debt Settlement – Depending on the approach taken for settling the debt the credit report impact can be significant. Accounts that are allowed to go delinquent or result in legal action against the consumer by the creditor may create a more damaging pattern of poor credit performance than an approach where the debt is settled quickly. Allowing outstanding debts to sit and fester while they are hopefully settled over a long period of time extends the credit impact and leave the issue unresolved. in that case what prospective employers may see is, well, just a mess.

From my personal experience and experience in working with many people over the years the most important thing you can do is take some action to address a current financial situation and explain that to future employers when asked. Your explanation is that you took some action to resolve the issue and that might even involve bankruptcy, which is a legal tool to get a fresh start.

Rather than fearing that your past credit problems may hold you back, just make sure the credit issues are in the past, your addressed them, and you’ve begun the process to rebuilding your credit. I even show you how to do that for free.

Damon Day - Pro Debt Coach

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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