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

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.

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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.

Dara Duguay and Joseph Shaheen
Joe Shaheen is a leading Washington, D.C., management consultant with over a decade experience in solving tough business issues with a focus on people’s challenges. He has been featured on CNN Headline News, Fox News Channel, and the Fox Business Network as an HR expert as well as numerous other media outlets. Shaheen is a former industrial engineer who became a recruiter, and transitioned into HR consulting. You can find his service offerings at Dara Duguay is the executive director of the Credit Builders Alliance. She has been involved with the issue of financial capability and empowerment for over 25 years. Prior to joining the Credit Builders Alliance, she ran her own consulting practice and advised clients such as TD Bank, the World Bank Group, Experian, Visa, and SunTrust Bank on their financial education efforts. Duguay was also the Director of Citi’s Office of Financial Education and oversaw a $200 million global commitment. Prior to her work at Citi, she served as the Executive Director of the Jump$tart Coalition for Personal Financial Literacy, which advocates for increased financial education for youth.