Putting the Kibosh on Using Credit Checks in Hiring Decisions

Update 5/22/13: The original version of this post incorrectly used the term "credit score" in several places where "credit check" or "credit history" would have been more appropriate and accurate. The post has been edited to reflect that correction. Kevin Drum at Mother Jones has a piece that explains the process by which the credit reporting agencies deal with employee screening. Specifically, employers may request prospective employees' credit histories via a credit check, but these histories do not contain an actual credit score. Thank you to Greg Fisher at creditscoring.com for pointing out the error.

The use of credit checks to inform hiring decisions has been getting some much deserved scrutiny recently. Over the weekend, Charles Ellison for the Philadelphia Tribune and Gary Rivlin for the New York Times took a look at the practice of employers evaluating a job applicant's credit as part of the employment decision-making process. Ellison chronicles recent legislative efforts to curb the practice and points out that campaign finance data shows lawmakers are receiving sums of money from major credit reporting companies. Rivlin spoke with non-profit service providers and unemployed individuals who have experienced the negative effects of this phenomenon first hand.

On the surface, using credit checks as part of employment screening may seem like a simple, data-driven way for employers to ascertain a candidate's reliability. Upon closer inspection, however, using credit checks in this way is ineffective and exacerbates inequality.

Using credit checks to determine whether an applicant is a viable job candidate is ineffective for several reasons. First of all, credit checks are error-prone. In a recent Federal Trade Commission study, "one in four consumers identified errors on their credit reports that might affect their credit scores." Uncorrected errors on credit reports translate into lower credit scores.

Even if the credit check itself is "correct," there is little evidence to suggest credit checks are useful in evaluating trustworthiness in the workplace. Demos quotes a spokesperson for TransUnion, a major credit reporting company, who told the New York Times: “we don’t have any research to show any statistical correlation between what’s in somebody’s credit report… and their likelihood to commit fraud.”

So if credit histories are error-prone and not a great measure of employability, what ARE they really showing? As I told Ellison for his piece, “A low credit score [...] becomes more of a proxy for a person’s experience with discriminatory structures rather than a measure of their ability to repay loans in a responsible and timely manner.”

Here's what I mean by that. Credit histories are indeed a rough reflection of people's economic lives. Defaulting on a loan weighs very heavily on a credit report. But everything we know about why people have defaulted on loans during and since the Great Recession should make us think twice about using people's experiences with debt as a supposedly neutral measure of their employability. The presence of predatory and racially discriminatory lending practices in the housing market, the boom of student loan debt accompanied by stagnating, rather than rising, wages, and millions of Americans being un- or under-insured all point to structural, rather than individual, drivers of personal debt defaults.

Poor credit histories are therefore a proxy for our current economic conditions, a reflection of a person living on an income so low they took on debt to cope with basic expenses. A negative credit report could also reflect the experience of a person like Alfred Carpenter who was profiled in Rivlin's piece. Carpenter was laid off during the Recession and subsequently incurred major medical expenses from torn tendons in his knee. According to a 2012 Commonwealth Fund report, 41 percent of American adults (75 million people) reported "they had problems paying their medical bills or were paying off medical debt." After struggling for years to find employment and finding his low poor credit history score was a barrier, Carpenter is finally back at work, but still incredulous over his experience: “I have this accident and mess up my credit and now I’m the guy people don’t see as trustworthy.”

Given our current economic realities and the limits of the credit score itself, using a credit check to inform an employment decision allows employers to institutionalize a supposedly race-neutral mechanism within their hiring process, thereby reinforcing economic inequality over time. The unemployment rate is and has been high (as of March this year, there were over three people actively job-hunting for every one job opening). Legislation to end the practice of using credit checks in employment decisions will eliminate one of the many barriers unemployed people face to finding work and thus would be an important step forward to improving our economy overall.