By Chris Gelbach
You applied, aced the interview and received a contingent job offer. But then the company pulled it after checking your credit. It’s a scenario that happens often across much of America.
Forty-seven percent of organizations polled in a 2012 survey by the Society for Human Resource Management said they conduct credit checks as part of the employment-screening process. Of those that do, 58 percent do it after a contingent job offer, and 33 percent after the interview.
But Susan Shin, a senior staff attorney for the New Economy Project in New York, says that the credit checks sometimes don’t even stop there. “Employers are also running these credit check on their current employees,” Shin says. “So it’s not just job applicants, but also their current employees who are suffering from this.”
The top reasons companies gave for conducting credit background checks on job candidates in the SHRM study were to reduce/prevent theft and embezzlement (45 percent), reduce legal liability for negligent hiring (22 percent) and to assess the overall trustworthiness of the candidate (19 percent). Unfortunately, there’s not much evidence to support credit checks’ effectiveness in getting at these qualities.
“There’s an assumption that if you have certain things in your credit report, then that says something bad about you, but there’s no evidence to actually suggest that,” says Jeremy Bernerth, an assistant professor in the E.J. Ourso College of Business at Louisiana State University, who co-authored a 2011 empirical study investigating the topic.
In the study, the researchers had about 200 people fill out a personality survey, ran their credit score, and then had their boss fill out a performance evaluation on them. “The credit score was not related to counterproductive or deviant aspects of performance,” Bernerth says. “I think there’s an assumption that if you’re in debt you might steal or embezzle from your company. But our study didn’t find that at all.”
Credit scores are traditionally used by lenders, insurers and landlords. But by marketing to employers, the major credit bureaus were able to successfully develop another customer category. Bernerth and his colleagues launched their study after hearing radio and television ads touting credit checks as a legitimate tool to screen job candidates. “And we’re looking at each other as people who study this for a living and said ‘What? Where’s the evidence to back up that claim?’”
While the study was published in 2011, Bernerth is unaware of additional research published since that confirm the merits of credit checks as an employee selection tool. Instead, what a credit check may reveal better are unfortunate life circumstances. A 2013 study by the think tank Demos found that poor credit is associated with factors such as household unemployment, lack of health coverage and medical debt. A 2012 study by the Federal Trade Commission revealed that 20 percent of consumers had errors in their credit reports. And a 2014 report from the Consumer Financial Protection Bureau found that consumers’ credit scores may be overly penalized for medical debt.
The practice also may raise privacy concerns. “Why should a person have to share with an employer that he or she may have had some serious medical issues? Or that they had to file for divorce? Or that they have a lot of student loans? Sharing that level of personal info veers into areas that employers already cannot ask about under a lot of human rights discrimination laws,” Shin says.
To check your own credit, you can request a free credit report from each of the major national credit agencies once every 12 months; visit annualcreditreport.com to request a report. You can request an additional free report if you are denied a job because of bad credit or if you are unemployed and intend to apply for employment within 60 days of the request.
While credit checks remain a potential hazard for many workers, 10 states now limit employers’ use of credit reports in making hiring or other job decisions. Cities such as Chicago and New York also have passed restrictions on the practice.
Shin notes that the practice may actually hurt employers by causing them to lose out on good applicants and employees. And given the question marks that surround the validity of credit checks as an assessment tool, Bernerth recommends that employers temper their reliance on them.
“What we do know is that there are other options that show extremely high validity in predicting who’s going to be successful in a job, or who’s not going to be stealing from the company,” Bernerth says. These include tried-and-true tools like IQ tests, structured interviews and biographical data