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Credit Reports in the Hiring Process: How to Bring Clarity to the Confusion

by Apr 25, 2014, 5:26 am ET

Employers use credit reports to assess a candidate’s stability and their propensity to be dishonest or commit fraud. But this implies that the HR/recruiting representative understands how to analyze derogatory items on a credit report to determine whether they are the result of unfortunate circumstances or financial mismanagement. Oftentimes the interpretation tends to be a little off.

According to a 2012 survey by the Society of Human Resources Management, 47 percent of employers use credit checks when hiring for some or all positions at their firms. Additionally, a national survey by Demos (a research center for economic issues) found that 1 in 10 job applicants were told they would not be hired for a position because of their credit. These statistics confirm the widespread use of employment credit checks in addition to the power they wield over hiring decisions. 

The complexities of interpreting credit reports can make this analysis difficult and result in a costly hiring process, and of course it could mean missed opportunities in hiring top talent. However, if we are able to truly understand the nuances of a credit report, it puts the employer in a better position to hire the best applicants and not exclude viable candidates thereby shortening the recruitment lifecycle, and likely benefits performance as measured by cost and time to hire, and other metrics.

What to Do

Where a bad credit history might be a disqualifying criterion, employers may want to consider factors like the nature and the gravity of the derogatory entries and the time elapsed before denying the application outright. Qualified, but unemployed, workers in particular can become trapped in a Catch-22: job-seekers are unable to secure work due to damaged credit and are subsequently unable to escape debt and improve their credit because they cannot find work, which in turn reduces the possibility that they may be hired for other jobs.

Another extenuating circumstance is lack of adequate health insurance, which is often a contributing factor in unsustainable medical debt.

In addition to unemployment and medical issues, there are countless other situations (divorce, natural disaster) which may be a reflection of factors outside of the candidate’s control and not necessarily a reflection of their financial wherewithal. There may not be a linkage between these situations and a candidate’s ability to perform assigned duties.

The Case of Ms. Spoon

Ms. Spoon applied for a job at a large corporation in St Louis, Missouri. The human resources representative really liked Ms. Spoon and she was one of three candidates in line for the job. Although she had a stellar resume, the hiring manager disclosed that they would need to pull her credit report and do a background check.

Ms. Spoon, had been working with Justine Petersen (an organization that assists low-income individuals to develop, maintain, and increase financial assets) to improve her credit report and score. She knew that she had some past collections due to a previous period of unemployment. However, over the last two years she had always made her credit payments on time and had paid off many of the collections accounts incurred when she was unemployed.

Unfortunately, the hiring manager told Ms. Spoon that due to the past derogatory items on her report, she would not be able to offer Ms. Spoon the job even though she is qualified and a top candidate.

Not one to let an amazing opportunity pass her by, Ms. Spoon called Justine Petersen to ask for a letter on her behalf explaining why her credit report should not be used to exclude her as a candidate. The letter from Justine Petersen described to the hiring manager how Ms. Spoon had been working diligently on paying back her debts and how, by the time of the job interview, she had only three very old collections accounts left. The letter also noted that Ms. Spoon also had three positive, active lines of credit that she always paid on time. In fact, rather than filing for bankruptcy as an easy way out, Ms. Spoon was  taking responsibility for paying off past creditors and maintaining good relationships with current ones but the credit report, as it was traditionally interpreted, would not have shown that.

Ms. Spoon was hired for the job and has been working there for over three years now. She consistently receives high performance reviews.

This article is provided for informational purposes only and is not intended to offer specific legal advice. You should consult your legal counsel regarding any threatened or pending litigation.

  • Richard Araujo

    Has there ever been any objective study of whether or not a person’s credit history has any correlation or predictive value with regard to their job performance? Or is this yet another archaic, ad hoc practice that people just keep doing, and then use the people it excludes as ‘evidence’ of its efficacy, despite that being completely unsupported and fallacious? The underlying assumption in this article is that the practice is sound if done ‘correctly’ or ‘with care,’ is there any actual evidence for this soundness? If not, why is it even being supported by HR professionals and recruiters?

  • Martin Snyder

    Richard if you don’t take steps like these, you could inadvertently expose your “A” players to the poors, and since we know that “A” players want to work with other “A” players, it’s impossible to pursue excellence if you don’t relentlessly exclude lesser individuals. Very obvious if you think about it.

  • Richard Araujo

    I’ll repeat and rephrase my question for clarity then: Has there ever been any objective study of whether or not a person’s credit history has any correlation or predictive value with regard to them being an “A” player? Your statement assumes your conclusion Martin; that “A” players and others can be consistently differentiated via their credit histories. Is there actually evidence for this, or just a lot of people assuming it’s true and using the simple fact that they’re doing it, and excluding people, as ‘evidence’ of its efficacy?

  • http://www.humanalliance.com Joseph Shaheen

    @Richard @Martin: I share your dismay with the validity of credit reports. I’m pretty sure that there has been a number of studies showing some minor correlation between credit reports and some work-related factor. Though it’s not a study that I’m familiar with.

    This is why we could at least hope that if we do have to live in a world where credit reports decide the fate of a job application, then we can focus our non-profit efforts on making sure they’re read correctly, and that people who have had a less than positive credit history in the past are not penalized.

    I think the CBA has that as their focus as a non-profit and seems to be doing a good job getting the word out

  • Boris Cherner

    Richard, The Psychologist-Manager Journal published a study in 2012 by Laura Koppes Bryan and Jerry K. Palmer titled “Do Job Applicant Credit Histories Predict Performance Appraisal Ratings or Termination Decisions?” They found that there is no proven link between personal credit reports and criminal behavior or ability to perform assigned duties. I am not certain what would qualify an individual as “A” player or lesser, but anyone’s excellent credit score can rapidly decline due to a lengthy divorce or a costly medical issue. On the other hand, one’s ability to pay bills in a timely manner should not signal one’s ability to perform or succeed at a job.

  • Keith Halperin

    @ Martin: I’m taking your comments to be “tongue in cheek”as opposed to literal.

    @ Richard, @ Boris: I’ve mentioned this before-
    A given (recruiting) task or process’s value doesn’t lie in whether or not it actually WORKS, but rather, whether or not someone will pay someone else to talk about- or do it.

    -kh

  • Richard Araujo

    I’ve done a quick search here, and in the past I’ve looked into this. The body of evidence seems to be so weak it’s a wonder why people are even bothering with this anymore, unless of course Keith is right. Personally I think it’s just a case of continuing practice and people thinking more information is better, even if the information itself is of zero relevance and has no predictive value. People are always looking for a reason to say “No” to a hire because it’s almost always considered the right decision, it’s almost never questioned. People just assume facts not in evidence, assume a bullet was dodged, slap the HM on the back and say, “Good work.” Even though they may have turned down what could have been the company’s best hire.

    What’s more, given the performance of the banks that are the other side of these reports, the creditors, one has to wonder if their assessment of someone’s worthiness is worth anything. Their track record is a large number of subsidies, protections, and bail outs with still nothing but periodic large scale failures to show for it while handing out billion dollar bonuses to the people who screwed up to begin with.

  • http://www.humanalliance.com Joseph Shaheen

    @Keith always the wisest and best commentary!

  • Dara Duguay

    At Credit Builders Alliance we have a history of helping companies and organizations to understand the credit reporting process and credit reports. The many complexities and codes involved in the actual report, not to mention the fact that the “business” version of the report, as opposed to the “consumer” version, is even more complex. Many companies receive the business version of the report. As long as the policy of the company is to use the credit report in the hiring process, CBA is available to help in making this interpretation painless and accurate (dara@creditbuildersalliance.org).

  • Richard Araujo

    @ Dara,

    Painless and accurate is nice. Doesn’t answer the initial question of whether or not it’s actually useful though. I’m sure you have many testimonials to your staff’s ability, and from customers. Do any of them have any evidence that credit reports are reliable predictors of on the job performance?

  • http://www.humanalliance.com Joseph Shaheen

    @Richard Just to clarify, Dara’s organization is a non-profit that aims to make sure that employers do not penalize those who may have had bad credit histories. She’s not a vendor. I’ve been doing some work with them pro bono because I believe in their cause. She isn’t a vendor. Hope that helps.

  • Boris Cherner

    @Richard,

    You are absolutely correct in your inquiry and the study that I referenced in my earlier comment points out that credit reports are not reliable predictors of future performance. So whether there is merit to the predictive value of credit or not, it seems that the practice of using credit scores/reports shall, at least in the immediate future, remain as a part of the hiring process. It would be ideal if the hiring professionals were adequately educated to interpret these scores/reports properly. As Joseph mentioned, CBA is a non-profit that provides credit building tools to other non-profits around the country. Part of our work is to help hiring professionals distinguish financial negligence, overspending and mismanagement from certain unfortunate events that result in derogatory credit histories.

  • Richard Araujo

    @ Joseph,

    Understood, and I certainly think that’s a good function. I would love to see her put herself out of work by finally convincing people that you can really make sure you don’t reject deserving people over their credit report by just not using it in the process, period.

    @ Boris

    “[I]t seems that the practice of using credit scores/reports shall, at least in the immediate future, remain as a part of the hiring process. It would be ideal if the hiring professionals were adequately educated to interpret these scores/reports properly.”

    Isn’t that basically the same as saying, since bashing people over the head will remain a part of the process, it would be ideal if people learned how to strike each other appropriately to minimize damage?

    Our profession needs to stop enabling ineffective and counter productive processes ‘just because.’ It’s no wonder recruiting and HR are seen as a joke by many if the professional line is: “If you’re going to engage in this particular waste of time, we’ll teach you how to do it so you don’t get fined, and don’t let it harm your business too much.”

    Keith is right, too many Yes Men types teaching people how to maximize their use of ineffective and counter productive practices because not enough of us have the resolve to say, “No, this is a waste of time, it’s not effective, it will hurt your hiring and employee relations efforts, so stop doing it.”

  • Keith Halperin

    @ Joseph: You are very kind.
    @ Everybody: ISTM that-
    1) If there are studies which indicate there is no correlation between credit-worthiness and job performance.
    2) There is also considerable doubt as to the accuracy/timeliness of the information used to determine credit-worthiness.
    3) It’s likely that people with poor credit-worthiness may be disproportionately minorities and single mothers (adverse impact).
    We therefore have all the ingredients for a ********- huge class action lawsuit against the big/deep-pocket employers who use them for hiring decisions. Think what a great plaintiff Ms. Spoon might have been had if she hadn’t been hired….

    Happy Friday,

    Keith

  • Boris Cherner

    @Keith
    You hit the nail on the head in terms of minorities and single mothers. You can also include recent immigrants who simply are not accustomed to financial instruments such as credit.

    @Richard,
    I am not condoning this practice and personally agree that it should be eliminated. We, CBA, are not part of the recruiting or HR community and cannot dictate policies. We can, however, explain credit to the members of your industry and thus help persons with unfortunate, and sometimes uncontrollable, life circumstances obtain employment.

  • Richard Araujo

    @ Boris,

    For that, thanks. Helping people overcome a handicap that shouldn’t even exist is, unfortunately, a necessary function in this world. I liked some of the non profit stuff I got involved in. It is fulfilling work. Doesn’t always pay great, but the benefits are usually pretty good from what I remember.

  • Keith Halperin

    Speaking of lawsuits:

    United States: Sixth Circuit Shuts Down EEOC’s Credit Check Lawsuit
    Last Updated: April 16 2014
    Article by Jessica M. Arnold and Theresa A. Kelly
    http://www.mondaq.com/unitedstates/x/307340/employment+litigation+tribunals/Sixth+Circuit+Shuts+Down+EEOCs+Credit+Check+Lawsuit

    To prove its case on a disparate impact theory, the EEOC needed to provide statistical evidence that Kaplan’s policy was discriminatory. Thus, the district court dismissed the case because the EEOC could not meet its burden without this expert testimony.