Washington – Checking the credit histories of job applicants—a common practice among employers—is coming under fire.
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Four states have passed laws in the past three years that limit the practice, and similar bills have been introduced in 20 other states and Congress. The issue has surfaced in the wake of the recession, which has left many unemployed workers with tattered credit.
The underlying concern is that poor credit could become a barrier to landing a job. Employers contend credit checks help them evaluate candidates and protect against fraud.
Another concern is the potential discriminatory impact on hiring. That prompted the Equal Employment Opportunity Commission to hold a hearing Wednesday to listen to testimony from advocates on both sides of the issue.
Opponents of the practice cite studies showing that African-Americans and Latinos tend to have lower credit scores. They also dispute whether credit reports are an accurate way to measure an employee’s qualifications. An early 2000s study by Jerry Palmer, an Eastern Kentucky University psychology professor, showed that bad credit was a poor predictor of job performance.
“It is a practice that we believe is both harmful and unfair to American workers,” Chi Chi Wu, counsel for the National Consumer Law Center, said at the EEOC hearing. The center advocates for low-income clients.
State laws aimed at limiting the use of credit checks tend to carve out exceptions for certain industries. Oregon’s law, for example, exempts federally insured banks and credit unions, as well as some jobs in other industries. In Illinois, debt collectors, insurance agents and some state and local government agencies are among those exempt.
Proponents of credit checks, which include fraud examiners and credit-reporting groups as well as employers, contend the histories are an important screening tool for employers and tend to be used sparingly.
A recent Society for Human Resource Management study showed 60% of employers used credit checks to vet job candidates. Of those, 13% used them for all candidates.
Michael Eastman, an executive director at the U.S. Chamber of Commerce, told the EEOC that employers take individuals’ circumstances into account. Many at the hearing stressed that employers look for a pattern of careless financial behavior, not one-time events.
“It’s very easy for the best, well-intentioned people to have very difficult times,” he said. “Employers recognize that.”
Credit checks can also be used as a tool to protect businesses against fraud, supporters argue. A recent study by the Association of Certified Fraud Examiners of some 1,800 fraud examiners globally showed that fraud costs businesses about 5% of their revenue. In the U.S., the median loss was $105,000 in each incident.
In many of those instances, there were “red flags,” examiners reported. In 44.7% of cases, fraudsters were experiencing financial difficulties, according to the survey, and in 44.6% of cases, they were living beyond their means.
One problem in evaluating credit checks is confusion over what information is included in credit reports, how employers use them and what research has been conducted on the effects of using the checks in employment.
Experian Information Solutions Inc., a company that provides credit reports, offers an employment report that includes details such as a credit history, evidence of bankruptcy or liens, and information on previous employers. It doesn’t include a credit score—which takes into account various details of a person’s credit history and synthesizes them into one number. Much of the research on disparities in credit histories between racial groups is based on credit scores, though most employers never see that number.
“I have yet to see a study that shows the relationship between the use of credit reports and the disparate impact,” said Pamela Q. Devata, an employment lawyer at Seyfarth Shaw LLP who supports the credit checks.
“If there were, the federal government would likely be using this,” she said.
In Cincinnati, Fannie Jeffries, 49 years old, contends her bad credit is holding her back. Laid off in October 2008 from her data-entry position at a bank, Ms. Jeffries was unable to pay her bills.
Between student loans and credit cards, Ms. Jeffries said she was more than $140,000 in debt. She has applied for government work, clerical jobs and for a position stocking shelves at Dollar Tree, among others.
Ms. Jeffries understands why employers might be worried someone with bad credit would steal, but thinks criminal background checks are a better gauge of that propensity.