How Employers Can Use Credit Checks to Screw You Out of a Job

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By law, employers in the U.S. cannot make hiring decisions based on applicants' age, race, sex or religion. But what about their credit history?

A disturbing new report by the think tank Demos explains how companies across the country are using credit checks to vet potential employees. Researchers found that one in seven people with poor credit reported being told they wouldn't be hired for a job because of their financial history.

Most of the time, the positions don't even have do anything with handling money. Prospective maintenance workers, frozen yogurt servers and delivery drivers can all be subject to an inspection of their debts and have their job prospects jeopardized if an employer finds anything they consider off-putting in their credit report.

The process is completely legal. Federal law allows for employment credit checks with the permission of a potential employee, which means access to data about a person's mortgage debt, student loans, credit card debt, medical debt, bills in collection and more. (Credit scores, numerical representations of the creditworthiness of an individual in the eyes of the three major credit bureaus in the U.S., are usually not provided.) Federal law also protects an employer's right to discriminate against a candidate based on his or her credit situation, as long as they're transparent about it. 

"The idea is that if somebody is having difficulty paying their bills, then maybe they're not a reliable person, and not somebody you would want with your business," Amy Traub, senior policy analyst at Demos and the author of the report, told Mic.

"On the face of that that seems that may be a reasonable assumption," Traub said. "The challenge is that there's very few studies that have looked into this, and those that have, have not shown that a credit report is actually a reliable way to measure whether somebody would be a good and reliable employee." 

How often are people denied jobs because of their credit? The report draws data from a nationally representative 2012 survey of low- and middle-income American households with credit debt. Demos found that one in seven who have poor credit said they've been told they wouldn't be hired for a job because of their credit. One in 10 unemployed respondents said they've been turned away from a job specifically because of the information in their credit report.

Source: Demos
Source: Demos

Keep in mind that this is a conservative estimate, insofar as there is no effective way to verify or regulate employers' rationale for rejecting applicants. 

Who is more likely to have poor credit? When employers conduct credit checks, it's not clear what exactly they consider red flags for an individual they're considering hiring — disconcertingly, they can determine these on a whim — but most often the reasons fall into two categories: large sums of money owed and signs that somebody is struggling to pay off what they owe.

Demos found that "poor or declining credit is associated with households experiencing job loss, lacking health coverage, or having medical debt." The financial strains of life can weigh heavily on a person's credit, and weigh even more heavily upon those in the most precarious financial situations.

In the chart below, you can see that unemployment doubles the likelihood that someone reports poor credit:

Source: Demos
Source: Demos

Misfortune in health tends to be a misfortune for one's finances. Demos finds that "unpaid medical bills or medical debt is cited as one of the leading causes of bad credit." Lacking health care is also a significant predictor of credit issues: "Households that include someone without health coverage are more than twice as likely to report that their credit score has declined a lot in the past three years."

One of the more notable findings in the report is the disproportionate amount of minorities with poor credit. While 65% of white households describe their credit scores as good or excellent, only 44% of African-American households do. Latinos are also far worse off than white households.

Source: Demos
Source: Demos

A great deal of this can be explained by way of the wealth gap between white and minority households, which is largely the legacy of discriminatory 20th century housing policies. The net worth of white households is 13 times that of black households, and 10 times that of Latinos, according to Pew Research Center. That cushion of wealth is a game-changer when a family encounters a financial emergency that exceeds the capacity of a household's income. Some people manage their bills by reaching into their savings; others don't pay their bills, because they don't have any.

The implications of all this are a Catch-22 that showcases a kind of malice toward our struggling citizens: The very people who are already enduring financial stress are hampered in their ability to find relief with a new job.

It didn't have to be this way: The tragedy of this phenomenon is compounded by how manufactured it all is. Credit reports were originally meant as a screening tool for lending, not employment. 

"The companies that create these credit reports, the three big credit reporting giants — Equifax, Experian and TransUnion — developed credit reports over the decades as a tool for lenders to decide who was a good credit risk, who you should make a loan to, what their interest rates should be. You would want to look at their past performance in paying back loans. A reasonable tool," said Traub.

"These companies then figured, well, we've got this product, it's already sitting here, it would be very easy to sell it to other businesses for different purposes and make some more money," Traub said. 

The credit bureaus sold the idea to employers as a tool for gaining insight into a prospective employee's character. Employers buy it based on the logic that somebody who isn't good with their bills is more likely to be an irresponsible employee.

But as Demos's findings show, such a conclusion conflates irresponsibility with financial hardship and is disproportionately likely to penalize those who aren't faring well socioeconomically.

Fortunately there's a growing movement to stop the practice, and a number of states have banned the practice of employer credit checks. Hopefully the movement will go national.

h/t Demos