Bad credit ratings sinking job hunters

(MoneyWatch) Alfred Carpenter, 52, was working for a high-end shoe store in 2007, when the recession put the company out of business. A long-time salesman, Carpenter wasn't worried about getting another job, but then broke an ankle a few months later and ended up in the hospital. With no insurance and a $50,000 emergency room bill, he filed for bankruptcy protection.

Then his troubles got worse. One employer after another rescinded job offers after checking his credit report, he says. He finally found work, but at a fraction of his usual pay.

Such a story is far from unique. What many job applicants do not know is that credit reports are regularly used in hiring decisions, leaving millions of credit-scarred consumers in a Catch-22. They're broke, so they have credit woes; but those credit woes keep them from getting the work that could cure their ills.

"We know that about half of employers look at credit reports as part of the hiring process," says Amy Traub, senior policy analyst with Demos, a non-profit advocacy group. "If you have poor credit, one of the ways to get out of that is to get a better job. When that road is blocked, you end up in a Catch 22."

Frequently, it is errors on credit reports that haunt job candidates in these situations. Emmett Pinkston, a 55-year-old retired military man, was rejected for several jobs because of his credit report. But the catch is that the nick on his report was simply a mistake -- a $8,000 debt that never belonged to him. He has disputed the charge and one of the three main credit reporting agencies has erased it, while the others are investigating. In the meantime, he's working at a job at about half his usual pay.

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Traub, Carpenter and Pinkston are part of a wide-ranging coalition of consumer and employment groups that are attempting to break the tie between credit reports and jobs. On Wednesday, they and many others gathered on the steps of New York's City Hall to press for passage of legislation in New York City to restrict the use of credit reports in hiring in the Big Apple.

Meanwhile, the movement to cut credit reports out of employment has gone nationwide.

Eight states -- California, Illinois, Connecticut, Washington, Hawaii, Maryland, Vermont, and Oregon -- already restrict how credit reports can be used in hiring. Legislation is currently pending in a number of other states, including Massachusetts, Colorado, and New York State. The federal government is also likely to take up the issue this year, while addressing the nation's nagging unemployment rate.

In the meantime, job seekers need to understand that checking your credit record is perfectly legal in most states. And, for many jobs, it could be a pivotal piece of information that could secure a position - or land you back in an unemployment line.

The issue is particularly important today, Traub says, because so many Americans found their credit damaged during the 2007-2009 recession, and the lackluster recovery that followed. Now, literally millions of people have bankruptcies, foreclosures and late payments that could hinder their ability to find work or move up in their chosen fields.

Roughly 47 percent of employers do conduct credit checks as part of background investigations before they hire, according to the Society for Human Resource Management. However, that's down significantly from two years ago, when nearly 60% of employers surveyed used credit reports in hiring. The use of credit reports is particularly common with people hired for positions with financial responsibilities or handling sensitive employee information.

Why bankruptcy would hinder Carpenter from selling shoes, however, is beyond his understanding. "Apparently they think that because I filed bankruptcy, I might start stealing shoes. It's a nightmare."

Employers look at a lot of information to try to determine an employee's character, says John A. Challenger, president of Challenger, Gray & Christmas, a Chicago-based outplacement consulting firm. A long history of spotty payments could make an employer question a worker's responsibility, for instance.

However, Challenger thinks that one-time events, such as those caused by a job loss during the long recession, are understandable and shouldn't prevent good candidates from getting work.

That said, it has become imperative that job seekers check their credit reports prior to applying, so that they can head off issues such as Pinkston's , in which errors cost him job offers. Even those who know they have troubled histories should check their credit reports prior to applying for jobs, so they can review what their prospective employers are likely to see. In some cases, it may make sense to formulate a concise explanation of the problems prior to an interview.

People can receive a free copy of their credit reports every year at www.annualcreditreport.com. And remember: The Fair Credit Reporting Act requires prospective employers to notify applicants if they plan to pull a credit report.

Since less than half of employers check credit reports, Challenger said he would not volunteer information unless it was clear it was going to be part of the hiring process. He'd also be careful not to belabor the explanation for fear of sounding as if the applicant "protests too much." But, for someone like Carpenter, it might help to explain that his bankruptcy was a one-time event caused by an accident that left him with a pile of medical bills, uncovered by insurance, and not a sign of fiscal irresponsibility.

There are no guarantees, of course. But according to SHRM's most recent survey, around 80 percent of employers who check credit reports have hired people despite their bad credit, which gives a good candidate with a good excuse a good chance.

[redjohniii]

While some would claim that the statistics listed in this article may be flawed, the fact of the matter is that credit reports should not even be permitted for use in hiring decisions in the first place.

First of all, credit reports and credit scores were designed to be guides in determining if someone is eligible for credit cards, loans, etc. Credit reports were NOT designed to be all-around measures of "responsibility", "trustworthiness" and "likelihood to exhibit good job performance" for potential new hires. When credit reports are used as a hiring tool, they are being used for a purpose that they were NEVER intended to serve.

But more importantly, what aspects of a credit report indicate a potential new hire is a poor choice? It's impossible to say because, as I mentioned previously, credit reports aren't designed to be measures of character or job performance. So you've basically got a diverse corps of HR personnel all over the country each applying their own, personal, haphazard system of credit report interpretation for the purpose of employment. There are no standards. There are little or no studies that CONCLUSIVELY DEMONSTRATE that a given mark on a credit report makes somebody a poorer employment choice. There is no way to know that the HR person reviewing the credit report really even knows how to make reasonable sense of what they are looking at.

Finally, the last 6 or 7 years has demolished the credit reports of millions of Americans who previously had a great track record. For the sake of argument, let's say you suddenly get laid off from a 50K or 60K per year job and you can't get re-employed at a fraction of that salary. Subsequently you find that you can't make home mortgage payments or car payments or credit card payments that originated before your job loss. The result may be several missed payments, some bills may go to collections, or in particularly tough scenarios you may get taken to small claims court or have to file bankruptcy.

It's a terrible scenario that has been played out literally millions of times since the economic downturn began. But what does the scenario I outlined above have to do with your "responsibility", "trustworthiness", or "ability to exhibit good job performance"? Nothing at all, really. And that's precisely the problem. Bad luck is being interpreted by employers as "irresponsibility". That's plainly unfair and downright ridiculous!

Generally speaking, people don't get into financial difficulty because they are irresponsible or lazy. They don't run their credit score into the ground because it's fun. EVERYONE would rather be able to make ends meet, pay all their bills on time and have great credit. More often than not, poor credit is a result of dire circumstances that could potentially have affected ANYONE who had the bad luck to get laid off or get hurt or both. It usually has NOTHING to do with making bad decisions.

The people out there who really champion the idea of employment screening with credit checks are only of two types:

1) Companies that sell credit reports to employers and therefore make extra money off the screening process.

2) Folks who ought to be thanking their lucky stars that life has treated them well and left them with a tidy credit report.

Folks that fit into category #2 are the types that think their own dandy credit history has occurred because they make better decisions than folks with poor credit. Suuuuure it does. Let's see what would happen if they lost their job and couldn't get into another position at their old pay level for 8 or 9 months. All the sudden all of their past "wise decisions" would be over-shadowed by a crappy credit report that resulted from pure happenstance. And the funny thing is, the very practice they championed -using credit history AGAINST new hires- will keep them from getting back into a well-paying job. Ahhh... the vicious cycle.

[snickles121]

There is a site called "Bad Credit MD" that can help people fix up their credit report, and its free, unlike those paid sites that charge a fortune to do nothing.

[NAPBS]

With our weak economic recovery and stubborn unemployment rate, it is understandable that any story on the use of credit checks in employment screening will draw immediate attention. However, it is a common misconception in the marketplace that employers often use credit reports in all hiring decisions and your readers deserve the whole truth.

According to our research, an individual's qualifications and interview remain the first and second biggest influences to employers during the hiring process. Criminal records rank third in importance while credit checks were ranked least important of the factors. Based on a recent study that surveyed background screening companies, 83% of respondents reported that the use of credit reports makes up less than 11% of their annual sales. Also, the Society for Human Resource Management study, as referenced by the author, doesn't tell you the whole story.

The SHRM study actually found that only 13% of employers reported they review credit on all positions, while 40% of employers who responded reported they DO NOT review credit at all and 47% of employers who responded reported that they ONLY do check credit on selected candidates (91% for positions with Fiduciary and Financial responsibilities). This means the overwhelming majority of companies don't run a credit check on every job applicant.

With stories coming out daily on the challenges of finding employment, it is important that your readers have the whole truth and the facts necessary to inform their job searches. The National Association of Professional Background Screeners invites anyone with questions concerning the use of credit histories in hiring decisions to visit our website for more information at www.napbs.com.

[nfishman5]

Some of the information referenced in this article is misleading. Amy Traub suggests that half of all employers conduct credit checks and the SHRM study highlights research that points to 47% usage. Both are correct, but without they don't point to the other key piece of information here: of the 47% that utilize credit reports, only 13% do so for all employees. Most of those are in regulated industries where they are mandated to check credit. This statistic suggests that employers are tailoring their screening programs to only include credit where the job responsibility dictates doing so.

I don't believe that credit reports should be conducted on all people applying for jobs, but there are some positions where the information can be helpful. For instance, would you want to invest your life savings with someone who has a history of mismanaging their own finances? Generally, employers will take into account mitigating factors of poor credit such as a divorce, health issues and even the state of the economy over the last few years. They are looking for overall trends.

For some insight into how the courts feel about this practice check out the recent decision in EEOC v. Kaplan Higher Education http://www.employeescreen.com/iqblog/eeoc-case-against-kaplan-higher-education-tossed/

[naladogg]

Due to many unfortunate circumstances many of those unemployed had to make hard choices when it came to subsistence, and utilizing their credit cards to survive everyday living was one of them! This type of behavior keeps them trapped in bondage which only continues more suffering...especially for those who are dealing such the ills that came about during unemployment or wars! As the economy gains momentum ... job growth should do the same because if we don't our America as we've known it to be will be subject to more unfortunate situations such as those we come to see daily on the news - it's hard out here, and many are finding themselves overwhelming clustered in small apartments/homes with families who could not make it on their own!

[naladogg]

Due to many unfortunate circumstances many of those unemployed had to make hard choices when it came to subsistence, and utilizing their credit cards to survive everyday living was one of them! This type of behavior of keeping trapped in bondage (unemployment) continues to cause more suffering...especially for those who are dealing such the ills that came about during unemployment or wars! We must turn around as the economy does because if we don't our America as we've come to know it will be subject to more unfortunate situation such as those we come to see daily on the news - it's hard out here, and many are finding themselves overwhelming clustered in small apartments/homes with families who could not make it on their own!

[joe_e_s]

I agree with everyone. Credit checks for jobs that do not require some financial responsibility should be off limits. But there is another catch 22. When are corporations going to realize that unless they create customers through employment, how are they going to sell their products?

The problem is that no one wants to make a stand for common sense. Those who are employed forget about what if feels like to be out of work. They do not want the rock the status quo and stand up to protest this practice.

[beechnut79]

The reason they do not wish to rock the boat is simply because of fear of job loss. And in 49 out of 50 US states employment without a union or other form of contract is considered at-will, which means that you can fired for any reason or even no good reason. Montana is so far the only state where you can be fired only for a just cause. We need to begin a movement to move toward this end, even if not to a totally just-cause system, at least one where those who feel they were fired unfairly can obtain some recourse through independent arbitration. To me, speaking up against unjust practices should NOT really be an offense that should result in a firing.

[ConnieSW]

This is such a vicious catch-22. If you out of work, of course you are going to have trouble staying current on your bills, which is going to sink your credit score. Millions of people are caught in this situation. It should be illegal for most employers to use your credit score for hiring, just like it's illegal to consider age, sex, or race.

[beechnut79]

But they would still find ways to get around it, like they do especially with age.

[Krowster]

It's a shame that these mindless little companies feel that have to resort to these petty tactics when hiring people. How can they explain college debt, or losing a home during a deep recession? What we need is to have a list of companies that do this sort of thing, stop buying their garbage, and wait and see how they like it when the shoe is on the other foot.

People, we need laws to protect the people from this unscrupulous action, and invasion of privacy.

[flexsf]

Which companies are practicing this? If a potential employer opened up my credit report, and then denied employment after that exchange, I would expect something positive in return. That practice is imbalanced. It gives way too much power to potential employers. They don't deserve the power and they're abusing it.

[beechnut79]

Not only that, but when Mitt Romney made his fabled 47 percent comment which may have cost him the election, I had another take on it. In the current climate 47 percent is about the amount of the American public that is far enough on the wrong side of sainthood to be considered worthy of paid full-time employment.