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The Evidence on Pre-employment Credit Checks

posted by Bob Lawless

Senate BillElizabeth Warren, a blogger who left Credit Slips for the lesser fame of the U.S. Senate, has introduced the Equal Employment for All Act, which would bar credit checks for most pre-employment screening. A few states already have taken steps in this direction, with varying levels of efficacy. Senator Warren's bill would institute a federal ban and has been widely reported elsewhere (see here (Slate Salon) and here (CBS) for useful overviews).

The growth in the use of pre-employment credit checks has been the subject of several Credit Slips posts. Katie Porter first noted the development in 2006 and in 2010 discussed Rep. Steve Cohen's bill which was the model for Senator Warren's proposed legislation. Debb Thorne commented about the lack of any evidence connecting credit reports with job performance. Debb's own research documents how "off label" uses of credit reporting undermine bankruptcy's fresh start when credit reports are used to determine things like how much people pay for insurance or whether they get a job.

Senator Warren's bill has attracted opposition from the expected places such as the Consumer Data Industry Association and the Society for Human Resources Management. The former has data to sell, and the latter has services to sell. Those motives do not necessarily make their positions illegitimate. We should keep in mind, however, that there is money to be made in convincing those who make hiring decisions that there are data and services that can unlock the hidden traits of job applicants. 

Such claims play into a well-known psychological phenomenon known as the fundamental attribution error or the correspondence bias. As Gilbert & Malone put it:

People care less about what others do than about why they do it. Two equally rambunctious nephews may break two equally expensive crystal vases at Aunt Sofia's house, but the one who did so by accident gets the reprimand and the one who did so by design gets the thumbscrews. . . .

Attribution theories suggest that the psychological world is a mirror of the physical world and that the two are therefore penetrated by the same logic. Ordinary people seem to believe that others behave as they do because of the kinds of others they are and because of the kinds of situations in which their behaviors unfold . . . .

Attribution theory makes a distinction between situational and dispositional causes. A common mistake is to attribute an action entirely to a dispositional cause while ignoring possible situational causes. For example, when observing a driver running a red light, we often will jump to the conclusion the driver is reckless and ignore explanations such as a medical emergency.

The efficacy of pre-employment credit checks plays exactly into the fundamental attribution error. When we see someone with a bad credit report, we tend to attribute it to dispositional causes (poor financial decision making, financial recklessness, dishonesty) than situational causes (health problems, layoff, divorce). Moreover, we probably are especially prone to make the fundamental attribution error when it comes to financial problems. A dispositional cause allows us to tell ourselves the financial problems will not happen to us because we believe ourselves to lack the necessary disposition that will lead to the problems.

The fundamental attribution error, however, does not  mean that dispositional causes are never partially or fully explanatory. Sometimes people run red lights because they are reckless, or sometimes bad credit results from a fundamentally dishonest nature. Usually, the most complete explanations for any social phenomenon are multicausal. The question raised by Senator Warren's bill, however, is not whether some people might have dispositions that correlate with financial irresponsibility but whether credit reports can screen for bad employees. The fundamental attribution error makes us want to believe they can do so, but there is almost no evidence to support that notion (although more research would be useful).

A paper in the International Journal of Selection and Assessment by Oppler, Lyons, Ricks & Opper has been cited by the opponents of Senator Warren's bill. That paper, however, does not look at the use of credit reports, but instead examines two questions used on an employment application at a large federal agency (maybe the Bureau of Prisons given the authors' institutional affiliations). The questions asked if the applicant (1) had filed bankruptcy in the past seven years or (2) was currently more than 180 days delinquent on a loan or financial obligation. The study then looked to see if answering "yes" to one of these questions was correlated with "counterproductive work behaviors," which for purposes of the study was defined to include failure to pay debts and misuse of credit cards. Thus, the study seems to find that persons who are more than 180 days delinquent  on a loan or financial obligation are also more likely to fail pay debts or misuse a credit card. The paper has little relevance to the debate over pre-employment credit checks.

The rest of the research finds credit reports to be of no predictive value. A paper in the Journal of Applied Psychology by Berneth, Taylor, Walker & Whitman found no relationship between deviant employee behavior such as theft and credit score. The primary thrust of the paper was to examine the correlation between credit scores and the "big five" personality traits. The paper did find an association between credit scores and conscientiousness, but it also found a negative relationship between credit scores and agreeableness. The other personality traits were not correlated with credit scores. A different paper by Bryan and Palmer in the Psychologist Managers Journal found no correlation in a large financial services company between predictors extracted from credit reports and employee ratings or negative terminations.

What we do know is that pre-employment credit checks have a strong negative perception among the general public (see Kuhn & Nielsen). Over at Demos, Amy Traub has documented the negative consequences of pre-employment credit checks and their disparate impacts across racial lines. By making it more difficult for hard-working Americans to get back on their feet, pre-employment credit checks contribute to the perception that the game is rigged as well to the growing wealth inequality that plagues this country. It will be a difficult sell, however, as human nature makes us want to believe that credit reports must tell us something about the person involved. It is just another example of how we think we know what it isn't so


If you want to read the literature for yourself, I have assembled a short bibliography. Where possible, I have linked to a publicly available source for the document.

Berneth, Jeremy B., Shannon G. Taylor, H. Jack Walker & Daniel S. Whitman (2012). "An Empirical Investigation of Dispositional Antecedents and Performance-Related Outcomes of Credit Scores," Journal of Applied Psychology, 97:469-78.

Bryan, Laura Koppes & Jerry K. Palmer (2012). "Do Job Applicant Credit Histories Predict Appraisal Ratings or Performance Decisions," The Psychologist-Manager Journal, 15:106-27.

Gilbert, Daniel T. & Patrick S. Malone (1995). "The Correspondence Bias," Psychological Bulletin, 117, no. 1:21-38. 

Kuhn, Kristine & Marsha L. Nielsen (2008). "Understanding Applicant Reactions to Credit Checks: Uncertainty, Information Effects, and Individual Differences," International Journal of Selection and Assessment, 16:307-20.

Oppler, Edward S., Brian D. Lyons, Debora A. Ricks & Scott H. Oppler, (2008). "The Relationship Between Financial History and Counterproductive Work Behavior," International Journal of Selection and Assessment, 16:416-20.

Thorne, Deborah (2008). "Personal Bankruptcy and the Credit Report: Conflicting Mechanisms of Social Mobility," Journal of Poverty, 11:23-43.

Traub, Amy, Discredited: How Employment Credit Checks Keep Qualified Workers Out of a Job (Demos 2013)



If there is any correlation between credit and job performance, I wonder which way the causation flows. The NYT had a piece a few days ago about underwriting third-world entrepreneurs by using an employment test. That would imply that job performance affects credit, not vice-versa. Of course, it may all be picking up a common influence.


Do not support removing credit report requirements for potential job applicants. In my 50 years I have seen no benefit to stop and also obtain police reports as well. Everyone has a story, and that includes the information provided in three major credit reporting agencies may not be accurate. Prospective job applicants can get access to their credit reports free and if the information is incorrect and even correct, the time of explanation should be in the early parts of the interview. The key is if you already know and sit and wait for a prospective employer to find then you are likely not going to get an interview. When I interviewed people with these type of problems, my first question was what are presently doing to correct and how are you planning to accomplish.
There may be requirements from companies that your servicing to obtain credit reports and criminal checks on all of your employees. If the requirements in the past were not large, count on an increase of over 100% coming.

'found no relationship between deviant employee behavior such as theft and credit score'

One might expect successful thieves to have higher credit scores, but how would one know?

I see this as another example of government overreaching based on typical academic presumptuousness that they know better than people who run businessses and make hiring decisions how best to hire people. If the information is worthless, eventually, businesses, if permitted by government, will stop paying for it. I think it is a safe bet that HR managers, when called to make up a budget by a CEO whose bonus and options are tied to the bottom line, will look carefully at whether they get a sufficient benefit from this kind of expenditure. Unlike government, G&A budgets in the private sector don't run on automatic pilot y/y.

The following quote, I think, illustrates the presumptuousess, unfortunately: "The paper did find an association between credit scores and conscientiousness, but it also found a negative relationship between credit scores and agreeableness."

So, contrary to the claim that these reports have no value, in fact they do if you are looking for conscientousness. Even if there is a negative correspondence with agreeableness, it is the business owner who has to live with the employee and it should be his/her choice how to weigh conscientousness vs agreeableness, and government should not be mandating that the employer equate the two.

I would like to point out to Raymond that for applicants to be given a chance to tell their story is a nice ideal, but it seems as though 90% of the jobs are auto screened and that the bad credit score eliminates applicants from ever getting to the point where they could explain their circumstances. Thus locking them out of any chance of improving their credit score.

This is just another example of commodification of jobs and the difficulties of getting a job in this economic downturn.

The more you know about the background screening process going in, the better your chances of providing complete information without fear of shooting yourself in the foot. Always remember, the employer isn't out to get you, but their priority will always be protecting themselves from liability and obtaining a quality employee. So emphasize the good, explain the bad and don't try to cover up a mistake as it could do more harm than good!

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