Does a Tarnished Credit Report Equal an Untrustworthy Employee?

Last week, the NYT ran a piece describing how common it has become for employers to use the credit report as a screen device for job applicants ("Another Hurdle for the Jobless: Credit Inquiries"). In a nutshell, if your credit report shows too much debt, a bankruptcy, or a low credit score, employers don't want you.

Based on some of the employers' comments in the article, there seems to be a widespread belief that a tarnished credit report necessarily results from "bad decision making" and that it is evidence that an employee is "unreliable, unwise or too susceptible to temptation to steal."

Where the heck is the evidence for these assumptions? Just because someone has a low credit score or has filed for bankruptcy does not make him or her a shady untrustworthy character. It's much more likely that the person has experienced a job loss, medical expenses, break up of a family, over-the-top credit card fees and interest, or an attempt to avoid home foreclosure. A quick read of the bankruptcy literature will show that.

A couple years ago (2007), I published an article in Journal of Poverty using the CBP data describing the ways in which a bankruptcy on the credit report undermines the fresh start ("Personal Bankruptcy and the Credit Report: Conflicting Mechanisms of Social Mobility"). Over half of the respondents reported that they had been denied housing, transportation, credit, or employment explicitly because of the bankruptcy on their credit report. Respondents were denied jobs in accounting, mortgage lending, and even the moving and packing industry. Others were fired when their employers learned of the bankruptcy: one worked for the Traffic Safety Administration, one as a construction worker, and another as a clerk.

I know that some people are arguing that if the job is not tied to money and finances, the information in the credit report should not be used in hiring decisions. For example, in Hawaii, it is now apparently illegal to pull the credit report until after the job offer has been made, and then the credit check has to be directly related to the job qualifications. I would push further--even if the job has to do with money, the credit report should have no bearing. The fact is, just because someone's credit report is blemished does not mean they can't handle or be trusted with money. Consider the folks on Wall Street or people in the mortgage lending industry or even bank tellers and lenders at your local bank who, because of the shrinking economy, have lost their jobs--and then probably fallen behind on their bills, thus damaging their credit report. How much sense does it make to deny them jobs in the financial world? Not much. 

I want to share one CBP interview that I will never forget--and which illustrates my point beautifully. The guy had been in college earning a B.A. in accounting when he and his wife divorced. He got the kids, who were quite young at the time. He worked part time, but of course, there were no medical benefits. His son had some stomach issues and he had to go to the emergency room a couple times. The result was large medical bills that Dad could not repay. Eventually, because of the mounting medical debts, he filed for bankruptcy. Fast forward to college graduation. He's on the job market as an accountant. He lands several interviews with good firms--and the initial interviews go very well. Before the second interviews, all request his permission to pull a credit report. Of course, he agrees. Once they learn of the bankruptcy, he's dropped like a hot potato--no more interest in hiring him. One of the HR folks actually told him that given his bankruptcy, they didn't feel that he could be trusted. Baloney. This guy was working hard to pull himself up by his all-American bootstraps and instead he got slapped down.

I'm going to have to side with Representative Jon Switalski from Michigan on this one: Using the credit report as a screening device in hiring decisions is discrimination and is a practice that should be illegal. Moreover, from the point of the employer, it simply isn't a wise business practice--many smart and qualified folks are going to be overlooked just because of the economic downturn or someone in their family had the misfortune of getting ill.

Comments

[Sean H]

Arguing the other side: to the extent there is any informational value in asignal, it can be useful to incorporate that signal into decision making.

EXAMPLE: assume 1) the majority of BKs are from events outside of job applicant's control. But also assume 2) 40% of all BKs are from "bad decision making", and 3) assume a hiring manager believes 20% of the candidate pool will show "bad decision making", ex-ante, if the hiring manager is looking to minimise likelihood of having a "bad decision making" candidate sitting in front of them they can filter on the BK or bad credit score signal.

Yes that would be expected to also throw some good candidates out, and yes, it won't maximise likelihood of finding the best candidate (without making further assumptions).

Realistically, I'd imagine a hiring manager would want to weight this signal and not use it as a filter. But if it did have informational value, would incorporating it still be discrimination? I don't think so.

[Rick J]

Consider the information is being used to negotiate for lower pay.

[Chad]

Credit Scores will be used to choose which employees to lay-off and promote.

It may be wrong, or unjust. But it happens, and, it will continue to progress. As it becomes more difficult to differentiate top employees from each other based on their work.........you have to look to someone's personal life to find those distinguishing characteristics - good and bad.

If you're up for a promotion, or an evaluation in the coming year........I highly recommend volunteering at the red-cross. College kids....If I would've known better...........ditch the internships and volunteer. You network, pad your resume, and can look down the nose of the HR manager interviewing you.

If employers are cynical............the workforce must match them.

[AMC]

Section 525 is toothless.

[Patches]

Don't we have some laws on the books that prevent discrimination because of Bankruptcy filing? I have seen the opposite when it comes to our filers. I think also that Bankruptcy lessens the risk that someone would steal because they are already receiving help through bankruptcy laws; are required to preform in certain ways and are monitored by the UST. I have had some of our clients in uniform had their BK reviewed by the government but were not passed up for promotion or security clearance because of Bankruptcy not despite it. Border Patrol Agents are on point. Just got one in yesterday and he had a letter from his employer to address his high credit card debt. When he asked them about bankruptcy they said that would suffice. Had to be a 13 though because of high income but any other way would take food off of the table. We have had numerous Border Patrol Agents over the years and have not had that problem. Same goes for our DOD clients. I do believe BK code provides remedies for discrimination and may keep people with licensing issues from losing their licenses due to bad debts. I have only seen 1 case in 15 years that I have seen a debtor fired for filing 13 or 7. A very very conservative number on our filings over that period is 3600-4200 total cases over 15 years.

[Real Person from the Real World]

I work in staffing. Tell me if employers go over H1bs with the same fine toothed comb they use on US Citizens. On background checks, even for financial institutions looking for techies, they just want to verify employment, and frankly, the cost for checking much beyond the basics over seas is expensive. We have too few decent jobs and too many people. Apply for a opening for a crap job for a call center? Emplyers are ringing your phone off the hook, and they really don't care much about anything else, as long as you have a reasonable ability to talk and they think you might be able to lie and sell, sell, sell, sell.....

[Kurt Boll]

Sadly, my company is such an employer, and I agree with it. We are a financial institution, and are concerned that crushing debt or bankruptcies 1. can be indicative of poor impulse control (not proof mind you, but an indicator) and 2. could cause temptations in the wrong direction while handling other peoples money.
I say sadly because I want to believe every applicant is honest, and every resume complete, concise and truthful. Sadder still, since they so seldom are.

[Frank T.]

Are employers willing to use the same kind of criteria in hiring their top execs? If the last company you managed had to be bailed out by the Fed, you can't be any good as a manager or director? Same logic.

[Pete Dooley]

I went to a bank and as is common these days the young lady was new, I was negotiating a loan and had a long established business relation (long now is for five years or more) with this bank. She brought up that I had a blip in my credit "some years ago" (1991).. The first Bush recession. I explained that all business came to a screeching halt for months when war was declared in "91" (ah the educational system). I told her actually the bank I dealt with then went out of business.. Eyes popped wide open, bluster "wha.. Who!" I gave the name of the bank. "Oh NO they merged with___".. I explained, Yes, and now "they" The "merged" facility (longer an entity) was out of business as well. The young lady was beside herself that anyone would classify a "merger" as going out of business. By the way, the building this conversation was held in is now a doctors office. Her "bank" went out of business as well. Our town now has one bank in it, from a high of twelve, the remaining bank is a recipient of bailout funds.

I preface each banking transaction by questioning how long each facility expects to remain in business, that sets the tone of each conversation I have with the (90% of the time) junior college educated children in these facilities. To think that the inept banking/credit system in this country (rivaled only by its "health/wealth" care system) is arbiter of ones capacity to do a job well no longer astounds me.

[FJP]

OK, let me get this straight. Someone has accumulated some credit card debt -- for whatever reason, it shouldn't matter -- and now s/he wants to get a better job, maybe one with more potential for advancement, so s/he can make more money and pay off that credit card debt faster. But s/he will not be hired because -- oh no, the HORROR -- s/he carries a balance on a few cards.

Let's stop pussyfooting around and reinstitute the debtor's prison. Put these people in stocks in the public square because that must be what we really want.

There is in my mind a fundamental question that never gets answered in this discussion, which is why having ANY unsecured debt is considered a moral issue for certain economic actors -- those who generate income principally through wages and salaries -- but not for other kinds of economic actors, the ones we call businesses. In fact it's considered normal and healthy for those economic actors to have all kinds of unsecured debt and we can't imagine our economy being set up any other way.

[lmclark]

Reading the comment by FJP made me realize the irony of it all. We have expanded the availability of consumer purchasing (a major driver for our economy) on one of only two sources (1) the top 10% of the population with enough discretionary income to buy stuff without too much stress (maybe its 15% or maybe its 5% -- anyone got better numbers?) and (2) the bottom 90%, using the extraordinary amount of credit we extend to that population. That second group has to use credit, because real wages for them have been essentially flat for years, but the real cost of living has not.

Now, in an economy where jobs are scarce, employers can make them even more scarce by screening out the people who are having a hard time with credit -- roughly a million bankruptcy filings a year (the number of people is of course larger, because most filings are joint filings, husband and wife). Granted, not all of those people are actively looking for a job at any one time, but that is the number per year who now have bankruptcy added like a scarlet letter to their credit report. Over the years, that gets to be a pretty big number.

The irony, then, is that more and more people have to settle for even poorer paying jobs because of their credit history, making their credit situation only that much more dire. That, in turn, places extra pressure on their ability to continue to engage in consumer spending -- unless credit extenders engage in even riskier credit extending than they have done in the past. We now know where that can take us.

Maybe we can balance consumer spending on the backs of the top 10%, and pretty much ignore the rest of the populace. Certainly, a number of economies around the planet do that. And certainly even stricter hiring standards will depress both hiring and wages even more, leading to higher productivity for businesses. Perhaps that's a good thing, at least for the shareholders.

But at what cost? Will we in the top 10% just satisfy ourselves of our moral and social superiority, and simply ignore the rest of the poor mullets out there who lack our good judgment and superior skills? And if we do, will the vaunted American middle class simply melt away, and return us to the America of the 1890's?

[lmclark]

Reading the comment by FJP made me realize the irony of it all. We have expanded the availability of consumer purchasing (a major driver for our economy) on one of only two sources (1) the top 10% of the population with enough discretionary income to buy stuff without too much stress (maybe its 15% or maybe its 5% -- anyone got better numbers?) and (2) the bottom 90%, using the extraordinary amount of credit we extend to that population. That second group has to use credit, because real wages for them have been essentially flat for years, but the real cost of living has not.

Now, in an economy where jobs are scarce, employers can make them even more scarce by screening out the people who are having a hard time with credit -- roughly a million bankruptcy filings a year (the number of people is of course larger, because most filings are joint filings, husband and wife). Granted, not all of those people are actively looking for a job at any one time, but that is the number per year who now have bankruptcy added like a scarlet letter to their credit report. Over the years, that gets to be a pretty big number.

The irony, then, is that more and more people have to settle for even poorer paying jobs because of their credit history, making their credit situation only that much more dire. That, in turn, places extra pressure on their ability to continue to engage in consumer spending -- unless credit extenders engage in even riskier credit extending than they have done in the past. We now know where that can take us.

Maybe we can balance consumer spending on the backs of the top 10%, and pretty much ignore the rest of the populace. Certainly, a number of economies around the planet do that. And certainly even stricter hiring standards will depress both hiring and wages even more, leading to higher productivity for businesses. Perhaps that's a good thing, at least for the shareholders.

But at what cost? Will we in the top 10% just satisfy ourselves of our moral and social superiority, and simply ignore the rest of the poor mullets out there who lack our good judgment and superior skills? And if we do, will the vaunted American middle class simply melt away, and return us to the America of the 1890's?

[Credit Dispute]

I think the this practice is discrimination. There are just far too many reasons, outside of someones control to damage credit and they do not reflect poor impulse control, inability to handle finances etc. Even if someone had a bankruptcy due to their neglect and it was years ago, a person can certainly grow and learn from that mistake.

I see no difference in pulling a credit report and judging someone on that then looking at a person of color and saying 'well there is a higher crime rate with this race so I'm not hiring them'.