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Credit Scores Can Be Harmful to Employers and Job Candidates

Credit is a big issue these days. Whether it is about our financial institutions providing businesses with the capital to expand, or fear that your credit score has been compromised by identity theft, the topic of credit is a media constant. Type in to any internet search engine and the term “credit score” and it yields over 45 million hits.

Most all of the media hype about credit scores is helping people maintain and improve their credit ratings. Those annoying commercials by FreeCreditReport.Com (which are not really free) have heightened consumer awareness of the score's importance.

So, what does this have to do with HR? Plenty.

A few years ago I was consulting with a client on improving their hiring processes. As part of the client’s screening process was running a credit check. When I questioned some of the HR people why they were doing this, they indicated that it was part of their culture (as a financial institution) not to hire people with poor credit ratings. Digging deeper the rationale was that people with low credit scores are (1) less reliable, (2) more likely to steal and (3) if people can’t manage their own finances how can they be a good steward of the business.

In researching this topic I found that there is no credible published research to demonstrate that credit scores are correlated with any measure of job performance. There is no evidence, for example, that cashiers and bank tellers who steal have a lower credit rating than those that do not. Maybe there are internal company technical reports which can support the use of credit scores as a job related hiring criterion, but I know of none. (If you know of any, please contact me.)

The impact on employers and candidates is enormous. Consider the hundreds of thousands, if not millions, of candidates who may have been wrongfully eliminated from employment. Consider the cost to employers of hiring using a decision tool that is no better than flipping a coin.

In the absence of evidence to support its use as an employee selection instrument, the question that remains is: why are employers using credit reports to make hiring decisions?

I found this extrapolation of a credit score to predict work behavior an interesting phenomenon. It fits with one our primary motivations—the need to operate in a predictable environment. Psychologists call this an illusory correlation. That is, we tend to see a relationship between two events which in reality are not correlated, or which are correlated to a lesser degree than we believe. We do this in many ways. We stereotype people to provide us with an easy way to predict the behavior of others. We gravitate to indicators that have intuitive appeal, but have no factual basis. And we overestimate the importance of infrequent events in creating these relationships.

If employers want to measure such qualities as employee reliability, integrity and planning and organizing, then I would recommend a number of well developed, researched and documented assessment instruments. Many of these instruments measure conscientiousness, which has been shown to be one of the most consistent predictors of job performance, especially to such behaviors as absenteeism, tardiness, and retention. For about the same cost of running a credit check an employer can use a validated selection instrument measuring conscientiousness as well as a number of other job relevant personal characteristics. If one is really concerned about future employees honesty and integrity, there are specialized assessments that can measure this, too.

There is no need to use a surrogate measure of reliability when more direct and valid measures are readily available.

Over and above the measurement arguments against the use of credit scores for making hiring decisions, are the business practices and legal aspects. In 2004 The Society for Human Resource Management reported that 40% of the employers use credit checks at least sometimes. Certainly, the percentage has risen in the last 5 years.

On the legislative front, both Hawaii and Washington have restricted the use of credit checks to those instances where they have been shown to be job related. In Congress a recent amendment of the Fair Credit Reporting Act, H.R. 3149, is moving through the legislative process. The bill is designed to “prohibit the use of consumer credit checks against prospective and current employees for the purposes of making adverse employment decisions”.

The EEOC has also entered into the discussion. The concern of many is that poor credit is disproportional to minorities and therefore, the use of credit scores may adversely affect their employment. For example, in 2000 Fannie Mae found that nearly twice as many African Americans have poor credit ratings as Whites. While the EEOC has not stated a ban on the use of credit scores, they have remarked that such checks “should be avoided” and used only when “the employer can show that such information is essential to the particular job in question”.

It is good to see that legislation is moving to protect candidates from the use of an unproven selection device. On the other hand, it is sad to see that the science and professional practices have lapsed in their responsibility to bring some solid evidence to the table to support or refute the use credit checks as an employment screen.
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Views: 262

Comment by Les Rosen on December 30, 2009 at 3:30am
Interesting article. I agree 100% that there are much better tools to evaluate candidates. However, keep in mind first that a credit report is part of a background check, and is the last part of the hiring process performed after a tentative selection to see if there are any due diligence issues. In addition, it is an urban myth that credit scores are used for employment. That is simply not the case. When an employer receives a credit report as part of a background check, it is much different than a consumer credit report used for lending. First and foremost, an employment credit report does not contain a credit score precisely because there is no correlation between a credit report and job performance. In addition an employment credit report does not have age or date of birth. Further, the actual account numbers are not provided. In addition, a credit report pulled for employment does not count against a person’s credit score. It is true that a credit report will have a credit history, and that can be a source of difficulty. However, the actual credit score is not provided. For more information on credit reports and background checks, see: http://www.esrcheck.com/wordpress/815/basics-of-credit-reports-and-... For advice to job applicants that are concerned about their credit report being used for employment, see: http://www.esrcheck.com/wordpress/1103/job-hunting-and-credit-reports Background firms typically do advise employer to avoid credit reports all together unless there is a clear business justification.
Comment by Ron Rafelli on December 30, 2009 at 11:42am
I agree that using a credit report (Les is right, employers don't get the credit score) as a sole means of making a hiring decision is not at all valid, however, there is nothing wrong with using it as a tool in the process in positions where the employee has financial responsibility. As an employer, I don't want someone working with my money who cannot handle their own and I don't care whether or not there have been studies done to validate what is a common sense conclusion. To be fair, you also need to look at the reasons behind a bad credit report (divorce, identity theft, catastrophic medical expenses, etc). However, if someone has bad credit because of their own poor personal decisions, there are consequences to that, including losing the opportunity to work in certain jobs/fields.
Comment by Francine on December 30, 2009 at 1:03pm
Employers and recruiters have an obligation to vet perspective employees, a process that takes effort. Indeed, reading a credit report in a meaningful way takes time and if utilized should only be a part of broader reference checking process, not the sole determining factor when evaluating candidacy. Difficult times and circumstances fall on good people, especially in this economy. In my Mind, what others have to say about an individual's character and past performance weigh-in much more heavily.
Comment by Marsha Keeffer on December 30, 2009 at 2:33pm
When the job involves money, it can be appropriate to check a candidate's credit history. This is only one measure, however. Making it the focal point can cause employers to miss the full picture.

In the current economic climate, I'm sure there are many people who have gone through foreclosure, bankruptcy and other situations which have torpedoed their rating.
Comment by Paul Hughes on December 30, 2009 at 5:16pm
We've never used credit checks. Illusory correlation is bang on, Carl. If anyone is using credit checks, you should, at the VERY least, allow the candidate to provide insight. The absolutely trivial items that can have a detrimental impact on your rating makes it incumbent on you to do this. If not, you're probably doing the candidate a favour by not hiring them.
Comment by Gonzarelli Doelman on January 6, 2010 at 3:30pm
I supposed Bernard Madoff had his credit score checked?
I agree with Carl, there should be a better method for predicting human behavior.
The only problem is that we are all very complex. This means some will act out sooner while
others do so much later in their lives!

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