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Wednesday, October 7, 2009

why do employers run credit checks on potential hires?

A reader writes:

How widespread is it to look at a job applicant's credit history when considering them for a position? Why is this done? It seems like a complete invasion of privacy and a means to see how much salary you "really" need.

For a young person starting out in their career, I have a great credit score, but tons of debt. I am very responsible in paying my bills, but I don't see why this information should be available to anyone other than myself. And for those who are also unemployed and don't have a good score, what a horrible catch-22.

Shed some light please?!

It used to be that job seekers would only encounter a credit check if they were applying for a job that involved handling money or having authority over money. Some employers are now starting to use them more frequently -- but certainly not all or even most.

For positions handling money, credit checks are done to see if you have a pattern of handling money responsibly, or whether you have a checkered history that might impact your integrity and reliability when it comes to the company's cash.

For other types of positions, some people think that a credit report can show patterns of poor decision-making or lack of responsibility -- using it almost as a character reference.

Personally, unless the position handles money, I think credit checks are an invasion of privacy and the sort of over-reaching and abuse of power that really irks me to see in employers. Not only that, but I don't know of any research indicating a correlation between good credit and strong job performance, so I think the whole practice is suspect.

(By the way, Liz Wolgemuth has a great article here about a bill that was recently introduced in Congress to prevent private non-financial companies from running credit checks on job candidates.)


Christine Darling said...

Totally agree and want to add - running a credit check on someone doesn't give the whole story.

In my 20s, I had horrible credit. Had an employer wanted to check my credit, I would have looked like a bad risk. The truth was, though, that I was getting divorced and involved in an expensive custody situation. Letting some of my bills go during that time was the right and responsible decision, but that definitely wasn't reflected on my credit report.

I see very few valid reasons to check the credit of job applicants.

Anonymous said...

I think that any position that requires the person to handle or have access to significant amounts of money should require a credit check. I currently work in retail and there are are several individuals who work in the cash office with access to the safe who are not known for their sound financial management skills. I hope they are honest individuals who won't steal money, but by allowing them access to that large amount of money, my employer is taking a risk.

I certainly wouldn't want to be blamed if there is a cash loss so it's in my best interest to have honest people in the cash office. That concept usually means that my employer runs a credit check and will have people with good credit and someone who will be perceived as a person who won't want to take money from the office.

Caitlin said...

They also run credit checks if there is a potential for the employee to need to get a clearance. Bad credit/excessive debt will usually preclude you from receiving a clearance.

Hairy HR Guy said...

We run background checks on all of our new hires as a pre-employment check. Because of government requirements for notification, i.e. telling the candidate that we will "... retrieve information from all personnel, educational institutions, government agencies, companies, corporations, credit reporting agencies...", and because the notice has to state in accordance witht the Fair Credit Reporting Act, many of our candidates believe that a credit report is being done. Don't know enough about what the reader was looking at or told -- maybe this could explain it?

Anonymous said...

The FCRA clearly states that the credit checks are subject to the Equal Oppertunity guidelines. As such, if an employer uses a credit check, the credit check MUST be DIRECTLY relevant to the job. The credit check can only be conducted with permission. If there is any negative decision made because of the report, the employer MUST give you a copy and tell you it is because of the report and give you the information to contact the credit agency with which they checked so you can clear up any identity theft, dispute any incorrect information, etc.

If the employer doesn't follow the FCRA, you have the right to sue and claim damages. There are recourses if employers don't follow the law both under the FCRA and under the EEOC if the credit checks are NOT job related.

We employ people with a couple spots on thier records but if the credit is consitently mismangaded, we won't hire the person. I think there is something to be said for access to cash but even more importantly, if the person can't manage their own finances and wants a position of substaintial authority, why would I hire them to manage my finances or my companies? I would be crazy. If you have credit issues and know you have credit issues and are applying for one of these jobs, you should take the initiave and let the employer know when they ask to conduct the credit check if you have an extenuating circumstances or why there are some issues. The time to bring it up is when I ask to check the credit not after because by then my assuption was that you were tring to hide it. I won't ask to check the credit unless I am serious about persuing you for the position.

I would also say that these checks are costly. I am not going to run a credit check on every employee, only the ones that have significant access to cash or influence within my company. There are other checks and balances in place. Right now we run credit checks on anyone with the authority to sign checks, our AR/AP people and the cashier supervisor who locks up at night. That's it. Out of 350 employees we only run 20 credit checks.

I think the Hairy HR guy might be right that job seekers might be confused. The use of criminal background checks are also governed by the Fair Credit Reporting Act and as such use the same disclosures... As the HR Pro, I try to explain the difference as I have my employees sign the forms and explain to them what we are actually doing so they uderstand the process and are fully informed. Our credit check and background check use the same disclosures but are completely different forms.

Kerry Scott said...

I can't even begin to express how I loathe this practice. I refuse to work for an employer who does this (and my credit is excellent, and I have no debt other than my mortgage and one that's not the issue).

Even for positions that handle money, there is NO connection between bad credit and stealing money. For that to make sense, you'd have to run credit checks on existing employees regularly, not just new hires. No one does, because there's NO connection.

One of the biggest reasons for bad credit is medical bills. People get sick, and they either don't have insurance or have crappy insurance. How does that indicate bad character? Bad luck, maybe. Bad character? Nope.

Women are also disproportionally harmed by divorce in terms of their finances/credit. They are more likely to stop working to stay home with children, and when they divorce, their financial situation is statistically far more likely to deteriorate. That's not a sign of bad character either.

Like I said--I don't work for people who rely on credit checks as a character reference, anytime, ever. I've seen up close how employers REALLY use this information, and I never ever want to be a part of that again.

Rebecca said...

I hope the bill outlined in Liz's article passes, even though I'm pretty confident that employers will find creative ways around it. The situation described in the beginning of the article is way too common, and I've also seen new graduates lose out (you need a job to pay off the loans you took out to go to college... but you'd be a bad employee because you took out loans to go to college?).

Ben Eubanks said...

As far as I know, a credit check won't show your pay/salary, so it won't tell them how much money you "need."

Unless I'm wrong. Which may have happened once or twice.

Anonymous said...

There is also the case of identity theft. Just after I started looking for a new job a couple of years ago, I found out I was an identity theft victim. Every place I interviewed where the employer ran credit checks, I informed them that I was resolving a case of identity theft, and could provide copies of my police report and all my communications with the credit bureaus to prove it.

Never heard from any of them again. I suppose it's possible I messed up those interviews in other ways, but I can't help but wonder if the employers thought I was lying or thought it was my own fault I'd been a victim (if you're thinking "well if you let your identity get stolen you obviously aren't that responsible" -- please tell me how I was supposed to keep my own father from knowing my address, birthdate, and SSN).

Kerry Scott said...

It doesn't show your pay. It does show how much you owe. Here's how I've seen that used in practice:

"He owes a ton of money. We shouldn't hire him because he's constantly going to be asking for raises/looking for a higher-paying job/likely to steal from us."

"I don't think she's balk at the demotion. Didn't you see her credit report? She's in debt up to her eyeballs. No way is she going to quit."

"I think she's got some sort of serious illness. Her credit report is full of medical bills. If we hire her, our insurance rates are going to go up. I think we dodged a bullet here."

"He's single and he doesn't have any debt. He's probably got family money. I bet we could get him for $30K" (for a job they were otherwise going to pay $38-42K...and they DID get the guy for $30K, and he ended up getting fired for stealing, because "no debt" does not mean "unlikely to steal")

True stories, every one.

Ono said...

Kerry, your true stories are pretty much why I asked. I have nothing to hide, but I think its entirely unfair AND unethical. Your stories are proof that gaining that knowledge doesn't make for an unbiased assessment of the person's skills and fit for the job. Loosely veiled screening.

I have been out of college for almost 3 years now. I remember several instructors telling us about this and thinking "no way". But, I DID see it on one of my applications recently.

George Guajardo said...

Kerry and I are on the same page, it seems. I was thinking about the potential for adverse impact of this practice. It is likely that some demographic groups would be affected negatively than others if this practice is used for selection.

In and of itself, this is not sufficient reason to eliminate the practice, but if it is the case, then the employer had better have some serious evidence that credit scores predict job performance, or other specific job-related behavior (stealing, absenteeism, turnover, etc.).

In all my years studying selection systems, I never came across an empirical study linking credit scores with performance. Maybe I missed something...

Anonymous said...

Wow, Kerry, I had no idea. I do know that I was not happy that I had to submit a blood sample as part of a pre-employment physical (for a desk job). I wondered what information they were looking for and how it would be used. If I were diabetic or had some other condition, would they have retracted the job offer?

Kerry Scott said...

My husband had TB tests at his last couple of jobs, because he works in a hospital (not as a health care provider, but he does have contact with patients). They were all post-hire though.

I can't imagine why they would need a pre-hire blood sample. That's a little horrifying.

Anonymous said...

One thing I didn't see mentioned is that credit reports include a list of organizations that have requested that report along with the reason (job application, loan application, etc). Would it be possible a credit check could show other companies an applicant had applied to previously?

Anonymous said...

Like any screening, it doesn't give the whole story, but it does help in the decision.

2 people we've hired had horrible credit problems, which prevented them from traveling (ever try renting a car without a credit card?) until I could rush through a corporate credit card app.

They both ended up using the cards for personal purchases and were eventually dismissed.

Deb said...

Not only do I agree that a credit check has nothing to do with how one performs on a job. Handling money or not there are people that are ethical, but have fallen on hard times that would never be tempted by the amount of money they handle; it's just not worth the risk of the consequences of being caught and those that steal from their employers will be caught.

Did everyone forget about our bad economy and the layoffs involved. I don't think those that are having credit problems are because they were not cautious about handling money, they probably never thought the economy would get this bad and didn't think they would be laid off. They probably used all their savings, all their resources and still haven't found a job yet. Credit checks should have nothing to do with a potential candidate getting a job.

Anonymous said...

Employers will discriminate any way they can. In fact, they do so every day. It may not be in-your-face discrimination but there are ways around the law.

Older workers can easily be snubbed by a manager who simply states that a younger worker is better qualified. No proof necessary since employment apps are not public documents and applicants give in to whatever managers tell them.

There's always a way to pick one employee over another.

Credit checks are not necessary and applicants must stand their ground. Unless the job involves money, credit checks prove nothing and can indeed be used against you.

Stand your grond.

Anonymous said...

I have been unemployed over a year now. Of course, my credit isn't good. I need a job in the worst way and I have excellent skills. I am an honest person and a hard worker. I think it's unfair to judge someone on their credit score. How in the world will people like me ever get ahead if we are being judge on that? I have applied for hundreds of jobs and have had no luck at all. My credit score must be the problem. I think it should be against the law to check someones credit score unless the job requires the handling of money. That needs to be changed. Especially with the unemployment rates like they are. Let's say all the people who have questionable credit can't get a job; what does that say about our country and it's leaders. Most of us with credit problems have them because of our so called leaders. We need to write our congressmen, Senators, etc. and get this practice changed.