Credit Checking Candidates: The Good, the Bad, and the Ugly

How important, really, is it to know the credit history of a prospective job candidate?

Almost half of employers still run credit checks, with many of which doing so to prevent or reduce theft, as well as to potentially reduce liability for negligent hiring. Other reasons companies hold fast to this practice: To assess overall trustworthiness of a candidate, to help predict job performance, and to confirm work history.

Many of these rationales have come under fire, though, in recent years. Everyone from community groups to HBO television show host John Oliver has criticized this practice for being inherently discriminatory and for denying highly qualified candidates jobs based on circumstances outside of their control.

Eleven states and a number of municipalities have even passed laws that restrict the use of credit information by employers.

So, is there a compelling argument for why recruiters and HR professionals needs to delve so deeply into the privacy of candidates?

Keep reading for the good, bad, and ugly of credit reports.

The Good

Credit reports may actually be a relevant screening tool for certain industries, like the financial industry, where fraud and embezzlement are concerns and where the job requires financial responsibility. Even some of the states that have laws in place protecting jobseekers against unfair credit checks make exceptions for law enforcement, certain financial professions, as well as other professions involving a high level of public trust or access to sensitive information — in addition to employers who must run employee credit checks under federal law.

“We use credit reports for hiring here,” states Danielle Kunkle, vice president of Boomer Benefits. “We are an insurance agency, and it helps us to determine whether the person will be able to get licensed since many carriers won’t appoint people with bad credit – they consider a person who has a great amount of debt to be a risk for fraud (i.e., having clients write a premium check made out to the agent instead of the insurance carrier).”

Additionally, credit reports may even be able to partially help recruiters fact-check resumes and salary histories. For example, if a candidate’s resume shows a steady employment record, but the credit report shows excess credit use and/or late payments, this information suggests further investigation is needed to determine if the applicant simply is living beyond his/her means or lying about employment and/or salary. This of course doesn’t mean the candidate should be disqualified from the running, but rather that more questions should be asked.

The Bad

On the flip side, there is little research that confirms the link between credit checks and employee performance or behavior. Not to mention, between huge student debt, the housing market crisis, and the financial meltdown, many jobseekers have one or more blemishes on their credit report. This all means that if you have a policy of denying candidates jobs based on poor credit reports, you could be severely limiting your candidate pool based on unfounded assumptions.

Furthermore, lower income jobseekers of color are more likely to have bad credit than white jobseekers, leading to possible discrimination in hiring. A 2012 Demos study of credit card debt in low- and middle-income households found that African American and Latino households have worse credit, on average, than white households.

For these low-wage jobseekers and workers with poor or spotty credit, the use of credit reports by employers is simply one more potential humiliation – on top of the problems encountered when landlords, insurances companies, and others use credit reports to grant access to certain amenities and services.

The Ugly

Errors run deep in credit reports, most of which are provided by one of three major companies: Equifax, Experian, and TransUnion.

The most recent full study by The Federal Trade Commission found that one in four consumers reported at least one error in their credit reports. A similar study by the Policy and Economic Research Council found similar results – with almost 20 percent of credit reports containing at least one error.

Worse, perhaps, some studies have found that almost half of all credit reports have incorrect personal information, including misspellings of the person’s name, wrong Social Security numbers, inaccurate birth dates, inaccurate information about a spouse, and out of date address.

The End?

A movement is afoot across cities, states, and even at the federal level to eliminate and/or reduce the use and access of credit reports by employers. Activists behind this push want to break the vicious cycle some lower income jobseekers find themselves in. That is, the fact that they cannot find a decent job because of bad credit and outstanding debt, but cannot get themselves out of the debt situation because they cannot get a job.

So before you run your own credit check, carefully consider the benefits versus the drawbacks for both your hiring pool and your conscience.