Research and Statistics

States stepping up to limit pre-employment credit checks


If you’re unemployed and suffering from bad credit, a growing number of states’ lawmakers want to remove one barrier between you and a new job: a credit check

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If you’re unemployed and suffering from bad credit, a growing number of states’ lawmakers want to remove one barrier between you and a new job: a credit check.


The map shows states that have either enacted laws in recent years limiting the use of credit information in employment decisions or whose lawmakers have proposed similar legislation in 2010

Across the United States, legislators are working to remove employee credit checks as an obstacle to job seekers with poor credit. Based on a survey conducted in 2009 by the Alexandria, Va.-based Society for Human Resource Management (SHRM), 60 percent of employers said they conduct credit checks on at least some prospective hires. That means if your credit report includes negative items — such as unpaid bills, foreclosures or even high debt levels — it could potentially prevent you from getting a job.

That may change. A significant number of elected officials nationwide believe that in a difficult economy, a poor credit history shouldn’t be a determining factor for job applicants.

“This is an obnoxious practice that has been excluding a number of perfectly acceptable, perfectly qualified job applicants,” says Connecticut State Rep. Matthew Lesser, a Democrat who twice introduced a bill seeking to prevent the widespread use of employee credit checks.

Lesser isn’t the only lawmaker fighting to help job applicants overcome poor credit. Since 2007, four states — Hawaii, Washington, Oregon and Illinois — have enacted legislation limiting employers’ use of credit information. So far in 2010, data from the National Conference of State Legislatures show that lawmakers from 18 other states and the District of Columbia have introduced legislation that aims to limit the use of credit information in employment decisions.  Additionally, an amendment to the federal Fair Credit Reporting Act was introduced to prohibit the use of most employee credit checks nationwide. “You see this black stain of bad credit tarnish a lot of communities in my state and, I suspect, in states across the county,” Lesser says.

Those tarnished reputations may prevent consumers from getting much-needed jobs. “Legislators are trying to find that balance to help constituents who are out of work find jobs and not get caught in this downward spiral they can’t escape from,” says Heather Morton, a legislative analyst with NCSL in Denver.

The case for credit checks
According to the consumer data industry, employee credit checks are a necessary tool that helps screen job applicants. “Employers have clearly illustrated that the use of credit reports holds value for them, right alongside the personal interview, review of education history, resume, job skills, references standardized testing and other information that they use as part of the pre-employment process,” says Steven Katz, spokesman for the credit bureau TransUnion. He adds that these reports are often used when hiring for positions involving access to funds, trade secrets, client assets and sensitive personal information. (Katz stresses that consumers’ credit reports — notcredit scores — are used in such cases.) Some branches of the U.S. military even perform credit checks on potential recruits.

The credit industry argues that bad credit could signal a bad employee — or worse, a corporate criminal. The Association of Certified Fraud Examiners (ACFE) found that the two most common indicators of potential fraud were employees living beyond their financial means and employees experiencing financial difficulties. “Given that financial difficulties are often associated with fraudulent behavior, it would seem advisable for organizations to devote more efforts to conducting credit background checks on new applicants,” the ACFE said in its 2008 report.

“If someone has bad credit, that doesn’t mean they will commit fraud. But that person has a higher risk of committing fraud than someone with a spotless credit history — all other factors being equal,” says John Warren, vice president and general counsel with the ACFE. “We are not saying organizations shouldn’t hire anyone with a bad credit report, but it’s definitely advisable to have some idea about an employee’s credit history before you hire him or her — especially if that person is going to be handling money,” Warren says.

The Consumer Data Industry Association (CDIA), a trade group representing the major credit reporting bureaus, agrees that credit checks serve an important purpose. “Our position is that employers should be able to use those products and services that provide them with the appropriate information needed to make a hiring decision,” says Norm Magnuson, vice president of public affairs with the CDIA in Washington, D.C. For employers, an applicant’s credit history is just one factor to consider when deciding who gets the job. “The credit report itself is used when you get to those few candidates who might make the final cut,” Magnuson says. “Then it’s one of the factors that might come into play when you’re deciding who might be the best candidate.”

But does bad credit equal bad employee?
Not everyone is convinced that credit history can be used to forecast who will make a good employee. Even a TransUnion official has acknowledged that there is no confirmed link between having poor credit and being a lousy worker. “At this point, we don’t have any research to show any statistical correlation between what’s in somebody’s credit report and their job performance or their likelihood to commit fraud,” TransUnion’s director of state government relations, Eric Rosenberg, said in testimony before Oregon legislators in January. That comment represents a break with the credit industry’s position on the use of employee credit checks. When reached for comment, TransUnion was unwilling to elaborate on Rosenberg’s statement.

Some financial experts say employee credit checks don’t hurt only job applicants. “If there is no correlation, then employers who don’t hire consumers with bad credit could be missing out on some good employees,” says Sandy Shore, senior counselor with New Jersey-based consumer credit counseling agency Novadebt. “I can tell you that I have spoken to many consumers who have bad credit and are very successful at their jobs,” she says.

As unemployment continues to hover near 10 percent, a large number of borrowers find themselves struggling with financial problems. With a loss of income often leading to unpaid bills, unemployment can easily mean damaged credit. The latest evaluation of screening and hiring trends by human resources firm ADP showed that 41 percent of credit records screened in 2008 showed a judgment, lien, bankruptcy or referral to a collection agency.

Reliance on credit report information in hiring decisions can also lead to people being penalized for mistakes made by others. For example, job seekers could be impacted by errors on their credit reports — errors that a consumer wouldn’t even know about unless they checked their own credit report. “I think the majority of employees may have bad credit for any number of reasons that may not be their fault,” Lesser says.

National law proposed
That argument is echoed by other legislators who have introduced similar bills. At the national level, Democratic U.S. Rep. Steve Cohen of Tennessee introduced the Equal Employment for All Act, which would amend the FCRA by prohibiting the “use of consumer credit checks against prospective and current employees for the purposes of making adverse employment decisions.” In an interview with the Tavis Smiley radio show, Cohen said he expected that change wouldn’t come easily. The credit reporting industry “would lose some business, and they want to be able to use their reports for whatever reasons they can, and they’ll fight it,” Cohen said.

At the state level, Illinois State Rep. Jack D. Franks’ introduced a bill — which still allows for credit checks involving police, financial institutions and insurance companies, among others — that was signed into law by the state governor in August 2010 and effective January 2011. Franks, a Democrat, said before the law was passed that he hopes to avoid the creation of a permanent underclass — struggling consumers who are unable to improve their financial situations. “Poor people have enough problems as it is,” Franks said.

Franks also pointed out a central paradox of using credit checks in today’s economy: Some job applicants may be turned away by the same corporations that, amid their own financial troubles, have left workers jobless. “Many of the companies that are using these credit checks are ones that have filed for Chapter 11 themselves,” he says. “People may have worked for these same companies.”

‘No choice’ but to submit
Some lawmakers say companies should be the ones answering questions. Employers “must be able to justify their reasons for requiring this information and how it directly relates to the position. Since many employers require job applicants to waive their right to privacy, applicants have no other choice than to submit to a credit history inquiry,” says New York State Assemblyman Michael Benjamin, a Democrat who drafted legislation after hearing about his wife’s friend who was denied employment due to a poor credit history.

He points to a USA Today report that the Transportation and Security Administration (TSA) won’t hire airport screeners who have $5,000 in overdue debt or any federal or state tax lien. When reached for comment, the TSA said it couldn’t confirm that figure, adding that job applicants’ financial delinquencies are considered on a case-by-case basis. The TSA noted, however, that it is a basic requirement of federal employment that government workers pay back financial obligations.

“Beyond the basic requirement, TSA’s background investigations and credit checks get to the larger issue of insider threat. Employees who cannot meet their just financial obligations may be subject to pressures that could undermine security,” says spokeswoman Lauren Gaches.

That means certain applicants may not qualify. “This method has ruled out 22 percent of applicants from 2005 to 2007,” Benjamin says. “The checks that the TSA and other companies conduct have raised the question of inadvertent discrimination as 48 percent of African-Americans have ‘bad’ credit records in comparison to 34 percent for Hispanics and 27 percent for Caucasians.”

Other legislators say that’s a good reason to fight the use of credit checks. “Just as we successfully worked to prevent discrimination in the workplace based on one’s age, race or religion, we now need to work to prevent discrimination based on one’s credit history,” says Pennsylvania State Rep. Babette Josephs, a Democrat whose own bill currently remains in committee.

California bill terminated
Not everyone in government supports bans on employee credit checks, however. In 2009, after California lawmakers voted against the use of employee credit checks, Republican Gov. Arnold Schwarzenegger vetoed the bill amid pressure from Chamber of Commerce leaders who labeled it a “job killer” for putting added pressure on already struggling employers.

With a lack of bipartisan support for Cohen’s national bill, some analysts say state-level momentum will keep the issue of employee credit checks at the forefront. “The environment is there for a larger discussion on the issue,” says Jeff Hurley, a policy associate with NCSL.

See related: Credit checks for job applicants become more common, States weigh limits on credit checks for employment, Uncle Sam wants you…unless your credit stinks, How to dispute credit report errors, Free credit reports: How to get the actual free one, How to get a job when you have bad credit, Card issuers ready to check cardholder income, assets, 9 tips for job seekers with bad credit

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