Some good news for job seekers with bad credit

Low credit scores can hurt consumers in everything from securing a loan to finding a job -- or so conventional wisdom has held.

It turns out that when it comes to job hunting, a bad credit score might not be the red flag many had feared. Even though more employers are relying on credit scores to check the desirability of job candidates, evidence is scant that a checkered credit history actually hurts people in the job market, according to a new study from economists at Princeton University, University of Chicago, the Federal Reserve Bank of New York and the Social Security Administration.

Using credit scores for hiring has become an increasingly hot-button issue with lawmakers and public policy advocates. Critics have argued that the widespread trend of checking applicants’ credit scores creates unfair obstacles to Americans who are trying to get back on track. 

Several states have banned the use of credit checks in the hiring process, including California and Vermont. But those efforts may be pointless because no research has found that a poor credit score impairs a person’s prospects in the job market, the paper said.

Credit reports “are of limited consequence for outcomes where a broad range of additional information is available, such as hiring decisions,” the authors wrote. “Our results also indicate that recent political attempts to limit the use of credit reports by employers are unlikely to affect labor market outcomes, either positively or negatively, for the targeted populations.”

Bankruptcy filings allowed the researchers to examine whether credit scores might lead to different outcomes in both the job and loan markets. The two types of bankruptcy available to consumers -- Chapter 7 and Chapter 13 -- keep “flags” on credit reports for different lengths, 10 years and 7 years, respectively. That allowed the researchers to track what happened after the credit flags were removed at different points in the consumers’ lives.

In what will be a relief to consumers with poor credit or a history of bankruptcy, no difference appeared in terms of wages or employment after the flags were wiped from the consumers’ credit histories.

There are a few caveats, however. For one, the researchers looked at the impact on those who had filed for bankruptcy over a small period of time. Since most Americans aren’t frequently job hunting, the study might not pick up on longer-term impacts.

More important, credit scores do matter -- in the credit market, the researchers noted. Bad scores can harm a person’s ability to secure a mortgage and result in lower credit limits for credit cards, for instance.

Still, employers that search an applicant’s credit history might be looking at more than just a credit score. About half of employers run credit background checks during the hiring process, the Society for Human Resource Management found in a 2012 survey. The two chief motivations are to prevent theft and embezzlement and to lower their liability for negligent hiring, the survey found.

Of course, many other issues besides bankruptcy can show up on a credit report. Accounts in debt collection, current outstanding judgments and a high debt-to-income ratio are the red flags that employers said they’d be more worried about than bankruptcy, according to the 2012 survey.

Even then, it’s likely that job applicants would get a chance to explain themselves, given that about two-thirds of companies said they wouldn’t make a hiring decision until allowing the candidate to discuss their credit history. 

All in all, the research is good news for job hunters with spotty credit. But the treatment they might receive in the debt market is another story.