Don't Ban Pre-Employment Credit Checks

Last Updated Apr 12, 2011 3:53 PM EDT

You've always paid your bills on time and even put a little bit of money in the bank. But, when you lost your job and unemployment stretched for weeks and then months and then over a year, the mortgage didn't always get paid and neither did your reasonable cell phone bill, that you had signed a two year contract on. You're not irresponsible, but your credit is shot. The only thing that you need to be back to your old, responsible self is a job.

So, it hardly seems fair that you'd be prevented from getting a job because of a bad credit record when that bad credit was caused by you not having a job in the first place.

The recession is one of the big reasons 25 states are considering bills to limit or prohibit the use credit reports in the hiring process. It seems like a no brainer, except that it's definitely worth thinking about.

First of all, most jobs don't come with a credit check attached to them. USA Today pulls out a scary 60% of employers use credit checks, from the Society For Human Resource Management (SHRM) but neglect to mention the following detail:
A 2010 survey by the Society of Human Resource Management showed that 13 percent of the employers surveyed conduct credit checks on all job candidates while 47 percent do so for certain jobs. Of those employers, only 1 percent consider medical debt and 11 percent consider home foreclosure.
Well, that makes a difference, doesn't it? It's not that 60% of job offers are contingent on wildly invasive credit checks, it's that 60% of employers use them in some fashion for some jobs.

Additionally, most credit checks are done on senior people and the same survey showed that "[c]redit history ranked the lowest on a list of criteria employers typically use in making hiring decisions."

In other words, legislatures are responding to a perceived problem, rather than a real problem.

However, don't you want the person who does your taxes or invests your retirement accounts, to be someone who is responsible with their own money, thus lowering the temptation to take off with some of your money? So it makes sense to require anyone dealing with finances to have a credit check.

And what about HR people? Did you know that many HR people have access to your social security number, full name, address and date of birth? Do you want HR people with personal finance issues looking at your social security number? So it makes sense to require anyone with access to personal information to have a credit check.

And what about IT people? Lots of people access their personal bank accounts and use their credit cards to shop on company computers. Do you want an IT person with finance issues to have the temptation of figuring out your passwords? So it makes sense to require anyone in IT to have a credit check.

And what about the cashier? They have access to cash and credit card number. The office manager? Same. What about the janitor who can easily go through someone's desk at night?

When you break it out it doesn't seem all that invasive to lower a company's risk of a theft. Plus, if a person is responsible in one area of their life (money) it stands to reason they'll be responsible in other areas.

People who have poor credit have had a problem in the past paying their bills. (A credit record should not be confused with a FICO score, which can be low if you have the unpardonable sin of paying cash for everything.) Whether this is through no fault of their own or because of poor personal finance is hard to tell from a piece of paper.

But, the reality is, past performance is the best predictor of future performance. That's why we use resumes and reference checks. If you were a good, high performing employee at your last company, there's a good chance you'll be a good employee at a new company. If you are always reliable and responsible with your money, there's a good chance you'll be reliable and responsible with the company's money.

But, what if that credit record doesn't represent you. What if it represents a temporary bad condition caused by your state of unemployment? Are companies smart enough to figure that out? Do the unemployed need one more barrier to further prevent them from being unemployed?

Legislatures should be thoughtful in considering which restrictions (if any) they wish to place on their future employees. You want employers to be able to hire the best people, and if this tool helps them to do that, you want to allow it. If you want to put restrictions on companies here are my suggestions for good laws.
  • Credit checks should be made after an offer has been made, not before. Under the Fair Credit Reporting Act, you must be told if your credit has been used to make a decision against you. If employers can run the credit checks on candidates before making an offer, they can argue that the decision not to hire a person was based on the interview, not the credit check. This requires employers to own up to their decision and lets the candidate know exactly what the problem was. Sunshine can cure a lot of problems.
  • Require companies to have written policies on how credit histories will be used. It should not be up to an individual manager to determine that two late car payments means you are unhireable. Rather, there should be central, company policies that determine how that information is to be used.
  • Require companies to tell candidates up front if a credit check will be performed. You do have to get permission from someone to run a credit check, but this should be stated clearly, at the beginning of the process.
  • Require multiple years to be taken into consideration. If your credit was perfect until you lost your job 6 months ago, the person making the decision should be able to see that these six months are an anomaly, not the normal state of things.
  • Let companies decide when credit checks are necessary. It's impossible for a legislature to come up with an accurate description of when credit checks are and are not necessary. It is best left to the business to determine if having good credit is a requirement of the job.
Credit checks have their place in hiring, but they should be kept in their place. They aren't a substitute for a good background check and thorough interview. And they should not be taken lightly.

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Photo by Andres Rueda, Flickr cc 2.0

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