Caught Between a Job and Your Credit Score

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Written by Shawn Fremstad   
Thursday, 23 September 2010 10:48
Imagine you’re one of the 6.8 million Americans who have been unemployed for more than six months. (Imagine, that is, if you don’t already have the misfortune of being one of them). You receive a job offer that you quickly accept. But it comes with an increasingly common catch: your potential employer wants to check your credit first.

This catch, which they had assured you was only a formality, turns out to be a catch-22. When the HR person doesn’t like what they see, they take back the offer. It turns out you can only get the job you need to pay your bills and repair your credit history if you don’t have a credit history in need of repair.

If you haven’t applied for a job recently, or read press accounts of the increasing use of credit checks by employers, you might be astonished to know that employers can decide to hire or fire you because you were late paying a bill. But the use of credit reports by employers is now widespread. A recent survey by the Society of Human Resources Management found that 60 percent of employers conduct credit background checks for some or all job candidates.

If America is really the “land of the second chance,” it’s hard to think of a widespread practice that flies more in the face of this ideal than letting employers deny jobs to people on the basis of their credit history. Given the fundamental importance of this ideal, there must be really strong evidence showing that credit history tells employers something important about a person’s job qualifications, right? Wrong. In fact, according to researchers at Eastern Kentucky University who studied this question, there’s no connection between credit history and job performance. Employers who base their decisions on credit history might as well save their time and money by flipping a coin.

Even the credit reporting agencies that sell reports to employers have had to acknowledge as much. At a legislative hearing in Oregon earlier this year, a representative of TransUnion conceded that: “... 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 good news is that policy makers are starting to take note and do something about the unfair use of credit reports by employers. Last month Illinois Governor Pat Quinn signed legislation that makes Illinois the fourth state to restrict the use of credit checks by employers making hiring and firing decisions. Similar legislation is pending in 16 states and the District of Columbia.

In the U.S. Congress, the Equal Employment for All Act (H.R. 3149), introduced by Congressman Steve Cohen (D-TN), would prohibit the unfair use of credit checks for employment decisions. Just before Labor Day, Rep. Luis Gutierrez, Chairman of the House Financial Services Subcommittee on Financial Institutions and Consumer Credit, held a packed Town Hall hearing on the legislation.

Adding to the momentum for reform, the U.S. Equal Employment Opportunity Commission (EEOC) recently filed a class action discrimination lawsuit against a nationwide company that uses credit histories in hiring decisions.  According to the EEOC, the company’s use of credit reports had the effect of disproportionately excluding men, African-American, and Latino candidates from employment, which violates Title VII of the Civil Rights Act unless the company can show that the practice is justified by a business necessity and there is no less discriminatory alternative. Given the lack of evidence showing any relationship between credit history and job performance, companies that continue to use credit credits will have a hard time justifying them as a business necessity.

Even if you’ve paid all your bills on time, you could still be denied employment because of a credit check. Errors are commonplace in credit reports. While employers are required by federal law to tell you if their hiring decision was based on your credit history, there’s no real oversight or enforcement of this provision, and many employers are likely not even aware of it.

It’s time to put a stop to the unfair and arbitrary use of credit reports to make hiring and firing decisions. Especially in today’s economy—with nearly 10 percent unemployment and a doubling over the last four years in the share of outstanding debt balances that are delinquent—the stakes for American workers are too high to outsource hiring decisions to credit reporting agencies.

This article originally appeared on The Hill's Congress Blog.