Cracking down on job-candidate credit checks

September 26, 2011

Last week, the California legislature sent the governor a bill that would ban most employers from running credit checks on job applicants. If the governor signs the bill into law (which this web site tells us he’s likely to), California will become the biggest get yet for those pushing for such laws around the nation. Is this just what a country full of unemployed people with wrecked credit needs? Or is it, as HR managers have been hollering, a way of hindering them from finding good, upstanding workers?

The back story is as follows. A decade ago, about a third of employers ran credit checks on job applicants; today, some 60% do. HR types (and, of course, the Big Three credit bureaus) argue that credit checks help firms find reliable employees who are unlikely to steal from company coffers. Civil liberties types argue that pre-employment credit checks have a disparate impact on groups that tend to have lower credit scores, like minorities.

The Great Recession is what makes this back-and-forth particularly interesting. Losing a job is one of the fastest ways to wreck your credit. Now, it seems, that same bad credit may hinder you from regaining a steady paycheck and mending your finances. Quite the vicious cycle.

But you’ve also got to feel a little bad for firms. The labor market is full of asymmetric information and while employers often have the upper hand (they know how much other workers get paid, what employees actually contribute to the bottom line, etc.), it can be a very scary thing to go out into the world and pick a person to let into your business.

So who should win the debate? Should firms be banned from using credit checks in the hiring process?

Let’s look at the evidence.

There is a lot of reason to believe that using credit reports to judge candidates will lead to unfair outcomes. Consider, for instance, a case the Department of Labor won against Bank of America which revealed that by using credit checks in its application process for entry-level jobs, Bank of America excluded 11.5% of African-American applicants, but only 6.6% of white applicants. Who else might reliance on credit reports work to exclude? Well, the major causes of bad credit are things like divorce, large medical bills, and unemployment. So, maybe divorcees, the uninsured, and the currently jobless?

Now, one might argue that while such a situation is unfortunate, it is nonetheless part of a bigger picture. By judging job candidates on debt-to-income ratio, accounts in collection, foreclosures, bankruptcies, and education and medical debt (all things firms report will make them less likely to hire a candidate), employers are helping to ensure that they wind up with good workers.

The only problem is, there isn’t any evidence that credit is an indicator of how reliable a worker will be, or the likelihood that he will embezzle or otherwise steal. As a lobbyist for TransUnion testified in front of Oregon legislators last year: “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.” The state of Oregon has since banned job candidate credit checks.

So have Connecticut, Maryland, and Illinois, joining first-movers Washington and Hawaii. It looks like California will be next. And that’s almost certainly a good thing.

18 comments

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Who are they kidding? I had a 720 credit rating before losing my job in 2009. I know that I have been turned down for jobs because of my fico score. We as a nation have to start treating these issues with human decision making rather than allowing a score to dictate whether you get to be homeless or not!

Posted by Paperbackwriter | Report as abusive

These state efforts need to be spread across the country and expanded to prevent companies from demanding personal and irrelevant information. Company HR departments (who are (a) notorious liars and (b) lazy to boot) are simply looking for some way to be able to automatically eliminate candidates and avoid doing as much work as possible. Weather or not a given piece of information is a valid criterion for predicting future performance is generally intuitively obvious. Credit scores are driven by factors that are almost totally and completely unrelated to employment as well as factors that are outside the control of the individual (if too many companies are requesting your credit rating, it goes down, for example). The idea that your credit rating could predict criminal behavior is mind boggling.

Unfortunately, this kind of garbage goes beyond credit ratings. Some employers want access to your driving record as we discovered when my wife was going to do some temporary work for a company. Now, if you’re applying to be a driver for a company, knowing your driving record is relevant and important. My wife, on the other hand, is an IT professional who does database manipulation and interface design. Her driving record is irrelevant to the quality of work she can do. What makes this even more egregious is that she’s not a twenty something with little work experience. She’s been doing this stuff for 40 years.

Posted by majkmushrm | Report as abusive

The more information they can access, the more reasons they can use legaly to cover illegal employment decisions.

Too old ? Well overqualified is a bit dicey now but a bad/weak credit report does the job just fine. Fill in the blanks, just use bad credit and you’re covered.

Posted by Josiah_Bartlett | Report as abusive

I bet there are countless other criteria employer’s use to judge candidates that have yet to be demonstrated to the satisfaction of legislatures as reliable. My take is that if other folks think a business is failing to act in a way that makes more money, they should try doing a better job! Nowhere do I see a “market failure” argument for why the interests of a firm diverge from the interests of society.

Posted by TGGP | Report as abusive

Credit checks, and background checks in general make it easier for employers not to hire a given person. That’s because employers delude themselves into believing that they can make the perfect hire, whatever that is.

They want to do that because, yes, it can be difficult legally to fire for cause. But they really do it because hiring the right person is a difficult interpersonal skill, and one which few managers have successfully mastered. Rather than training managers in that skill, and affording them practice and the opportunity to fail, employers would rather complain that they can’t find the right people, whoever they are.

Hiring is difficult. Get over it. Train hiring managers, and give them the freedom to fail and learn the right lessons from it. Don’t be a wimp.

Posted by Curmudgeon | Report as abusive

This is an interesting conversation. Thanks for the comments.

Posted by BarbaraKiviat | Report as abusive

Absolutely outrageous. Total infringement on privacy and for that to be legal is disgusting, completely unethical behaviour by employers and just wouldn’t be allowed to happen in the UK.

Posted by AnnetteR | Report as abusive

Curmudgeon, you note that hiring is difficult. And so that implies we should make it more difficult by prohibiting employers from making use of one source of information? In an economy where hiring is already very depressed and employers are particularly apt to just give up on expansion and hiring? I really don’t understand the logic you’re using.

I understand that the plight of the unemployed and doubly unfortunate through bad credit scores is a terrible thing. But if we as a society want to remedy that, isn’t it society (or at least tax-payers) as a whole that should seek to remedy that through some form of subsidy? Prohibiting the use of information just leads to deadweight loss.

Posted by TGGP | Report as abusive

California can go right ahead and pass that law… it will last about 6 months before it’s ruled unconstitutional.

If I’m an employer I have every right to your credit history, your driving history, and in many cases I can test your urine to see if you enjoy snorting cocaine in your leasure time. I don’t have a right to your medical records (unless you’re a pilot) and I can’t ask who you voted for. We have several protected classes in this country… deadbeats and criminals are still fair game.

If you don’t like those rules or feel that my company dosen’t have the right to invade your privacy then start your own business… this is still the land of opportunity afterall.

Posted by y2kurtus | Report as abusive

y2kurtus, why don’t you tell us where you work so we can avoid doing business with companies that view everyone and everything with deep suspicion?

You’re not going to? Yeah, didn’t think so. Might say too much about your company’s attitude towards it’s customers.

And majkmushrm is right, HR is just lazy and generally incompetent. Between this, checkbox requirements and computerized candidate systems, they devised a perfect way to avoid taking any responsibility for a bad hire. It also explains why unemployment is so high….

Posted by ChrisMaresca | Report as abusive

y2kurtus, I’m no lawyer, but I can’t just accept your claims. Can you cite any example of similar laws being ruled unconstitutional?

ChrisMaresca, he said “If I’m an employer”, so it’s entirely possible he is not an employer and was just speaking hypothetically. Also, again I reiterate my suggestion that people who think these companies are just incompetent have a big profit opportunity. But I don’t expect anyone to try to take advantage of that opportunity, because I don’t think ANY OF YOU REALLY BELIEVE that the information you want to ban is COMPLETELY UNINFORMATIVE.

Posted by TGGP | Report as abusive

@ChrisMaresca I work at a mutually owned community bank in Maine… not exactly a corporate monster. We are owned collectively by our customers… no stockholders public or private. As such our primary motivation as a company is to serve our community’s needs… not to maximize our profits or even our growth. The reason we can and do perform background checks on our new hirers is that we need to make sure we hire responsible people. If you don’t pay your bills we can’t have you processing other peoples bills. If you’ve got a coupld DUI’s on your personal driving record I doubt a trucking company wants you manning one of their 80,000 pound 18 wheelers. In my state someone with over 20 moving violations on their licence plowed into a young mother’s car and killed her about 10 years ago. It was on the basis of that incident that my state passed a law to check the driving records of ALL licenced truckers.

@TGGP. I am not a lawyer either but I can tell you exactly why Cali’s proposed law won’t stand up. The first ammendment; it’s a free speech issue. Remember you do not HAVE to allow a company to check your credit or your driving record. You’re granting them permission in writing when you apply. Pass a law making that illegal and you just denied me my right to demonstrate to a prospective employer that I am a highly ethical and dependable person making it harder for me to differentiate myself from other applicants.

Posted by y2kurtus | Report as abusive

“…by using credit checks in its application process for entry-level jobs, Bank of America excluded 11.5% of African-American applicants, but only 6.6% of white applicants.”

Oh now that is just playing on sterotypes isn’t it? Is that to say BoA is racist and purposely did credit checks to exclude more African-Americans than whites? How did BoA know what the reports results would be? But well I guess we still gotta throw race in there somewhere.

Posted by iflydaplanes | Report as abusive

This is a breath of fresh air. This is wonderful initiative. Many folks with great credit have bad character and vice versa.

Years ago, folks could make investment mistakes or become ill or have a house fire or what have you and it was not the end of their credit worthiness but a life experience that can actually build good character,and better knowledge base…

now the rich rule our nation with an iron rod of a million and one forms of debters’ prisons– we all know the uber class has such wonderful moral values.

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