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Should Companies Use Credit Checks To Screen Job Applicants?
November 01, 2011 posted by Steve Brownstein
by Adam Cohen, TIME
It is a harsh catch-22, particularly in today's moribund economy: many companies routinely rule out job applicants who fail a credit check. That means that unemployed people who can't pay their bills may actually be too poor to get a job.
Critics, from labor unions and the U.S. Equal Employment Opportunity Commission (EEOC) to advocates for the unemployed, say the use of credit checks makes it hard for people who are struggling to turn their lives around and that it should be treated as discrimination. They have been pushing for state laws and federal policies to bar pre-employment credit checks; this week they scored their biggest victory yet when California enacted a law restricting the use of credit reports in hiring. (See five ways to repair a trashed credit score.)
Supporters, including business, industry trade groups and large credit bureaus, counter that employers should be able to weed out workers with a history of money troubles. They argue that credit histories are an important tool for employers to use, particularly for jobs that involve handling money, and that regulating their use could make employers less willing to hire.
The reliance on credit reports in hiring is becoming widespread. A survey by the Society for Human Resource Management found that 60% of employers do credit checks for at least some positions.
The use of credit checks is growing at a time when the economy is making it hard for people to keep their records clean. Delinquency rates on loans have been rising, according to a report issued last week by the American Bankers Association, driven by a weak job market and rising food and gasoline prices. (See the people who mattered in 2010.)
The biggest flaw with the use of credit checks in employment screening is that it makes it difficult for many good people who need work to find it. Employers who do credit checks operate under the assumption that having had trouble paying bills is a character flaw, but there is scant hard evidence to back this up.
Many credit problems are due to factors outside of a person's control. Sarah Crawford, an attorney with the Lawyers' Committee for Civil Rights Under Law, told a House committee last year that credit reports fail to provide sufficient context. "A credit report would not explain that a factory worker lost his job when his employer went out of business," she said. Or that "a man's credit was destroyed because he was the victim of identity theft or a predatory lending scam." Or that "a woman lost her job and her health coverage before developing breast cancer and incurring astronomical medical bills."
There is another problem: credit reports are often inaccurate. A study by the U.S. Public Interest Research Group concluded that 1 in 4 reports had serious errors. A 2009 Smart Money investigation headlined "Why Credit Bureaus Can't Get It Right" found that when consumers complain to credit bureaus about inaccuracies, they could often expect only 50 cents' worth of effort done by employees of offshore contractors to fix the problem.
Combined with the fact that many people do not even know what is in their credit report, errors of this sort can mean that job applicants are being denied jobs for things they did not do — and they may never find out about it.(See TIME's special on people out of work in America.)
Making matters worse, the use of credit checks falls disproportionately on black and Hispanic workers — the ethnic groups that happen to have among the highest unemployment rates. One study by Freddie Mac found that 48% of blacks and 34% of Hispanics have "bad" credit records, compared with just 27% of whites. Not surprisingly, people with low incomes have worse credit ratings than people with moderate or high incomes.
The racial differential can mean that the use of credit histories in hiring violates federal civil rights law. The EEOC has taken the position that the use of credit histories in employment is illegal discrimination. Last December it sued Kaplan Higher Education Corporation, charging that its use of pre-employment credit checks discriminates against black job applicants. At the time, Kaplan denied any discrimination and said it conducted background checks on all prospective employees; "We are an equal-opportunity employer, and we are proud of the diversity of our workforce," it said in a statement.
Even before California acted, momentum was growing at the state level to rein in the use of credit reports. In the past few years, Hawaii, Illinois, Washington and Oregon put limits on pre-employment credit checks; most recently, Maryland adopted a law in April, and Connecticut did in July. These state laws contain exceptions — they may not apply to certain kinds of companies, like banks, or when an employer can show that the credit check is legitimately job-related.(Read about how young veterans are dealing with unemployment.)
More than a dozen additional states are considering limits on the use of pre-employment credit checks. And it is likely that even more will be adopted. One of the many ways the Great Recession is affecting the U.S. is that it is expanding the number of people with bad credit — and, in the process, actually taking away some of the stigma. In these hard times, an increasing number of voters are likely to identify more with the struggling job applicant than the credit-checking employer.
