Should employers use credit information to screen job candidates during the hiring process? Senator Elizabeth Warren of Massachusetts says no. Last year she introduced into legislation the Equal Employment For All Act. It was referred to committee and is still pending. This bill amends The Fair Credit Reporting Act to prohibit the use of consumer credit checks against prospective and current employees for the purposes of making adverse employment decisions. There are exceptions including when vetting for jobs that require a national security or FDIC clearance. Senator Warren believes the use of credit information for hiring purposes creates barriers to employment, targets vulnerable groups and prevents qualified individuals from entering the workforce. She wants hiring decisions to be based solely on skills and qualifications.
“Let people compete on their merits, not on whether they already have enough money to pay all their bills,” Warren says.
It hasn’t been uncommon for employers to ask job candidates to disclose a credit history when applying for a position in finance or accounting or when they are seeking a job where they would have direct monetary access. Applicants seeking employment in executive management positions are often subject to one as well. The reasoning is that it simply removes temptation and curbs employer losses. But some employers argue that credit reports also help to expose one’s character and even shed light on a candidate’s decision-making ability. No evidence to this claim has ever surfaced. During a hearing for Oregon legislation on this very matter, a lobbyist for TransUnion testified, “At this point 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.”
Supporters of the bill cite that the 2008 recession has made the problem more acute. A lowered credit score can persist for several years. FICO puts a bad credit score at anything below 600. Reportedly a home foreclosure can reduce a score as much as 250 points. Home foreclosures, loss of medical insurance, death and divorce has damaged credit scores with the unemployed being harshly affected as well as women, minority groups, seniors and students.
“There is often long-term financial fallout,’ Warren says, when referring to these scenarios to which many have fallen victim. It’s a financial Catch 22. Without a job people are unable to pay bills to improve their credit score but unable to get one because of it. Warren feels the system is “rigged” to favor the wealthy. “A rich person doesn’t see their credit score drop 150 points because they get divorced, she says. “A bad credit rating is far more often the result of unexpected medical costs, unemployment, economic downturns, or other bad breaks than it is a reflection of an individual’s character or abilities.”
The error rate for credit reports is high. A 2013 Federal Trade Commission study reported that one in five have errors. Often they go undetected and are difficult to correct. The issue of privacy poses yet another concern. Pre-employment credit checks are considered by many to be a gross violation of personal rights, and a major intrusion.
But what about businesses? Employers who use this practice believe that pre-employment credit checks are a valuable tool to add to their toolbox. They help avoid negligent hiring lawsuits and curb fraud and embezzlement. They argue that it’s not commonly used as a deciding factor. A 2012 Society of Human Resource Management (SHRM) survey reveals that up to 47 percent of employers use credit reports during hiring; 34 percent of them state they use them only for select positions. SHRM reported that 80 percent of employers say they’ve hired in spite of a bad report. Skills, knowledge and abilities are the prime qualifiers for most, at 87 percent. Only 13 percent of employers say that credit reports are used as a major criterion without consideration to position. Some employers contend that candidates are offered an opportunity to explain a sub standard report prior to a decision.
Lastly, the distinction between a credit score and a credit report is noteworthy; employers report they consider the overall credit history rather than the score itself, deciphering information such as payment default, debt and bankruptcy.
Ten states, including California and Nevada, have passed similar legislation limiting the use of credit information for employment. Warren’s federal bill has widespread support from civil rights and consumer advocacy groups but significant industry opposition.
“… Nothing will happen if you don’t take that first step,” she said.
Gloria Sinibaldi is a career professional who has worked in the employment field for more than 20 years. She is a trainer coach and job developer. Email questions to firstname.lastname@example.org.