What is the Purpose of Pre-Employment Credit Checks?

Credit Checks Not Necessary for All Jobs

Background 2005 - 2009

Credit Checks are important in a few industries, but not in all. References below tell why.

Rice, Berkeley. Urology Times (medical journal); 5/15/2006, Vol. 34 Issue 6, p54-55, 2p

Attorney Geoffrey Anders in Pennsylvania, advises that 1) criminal background and 2) credit checks are mandatory for job applicants that would be handling any of the following materials in their new job:

  1. Cash
  2. Checks
  3. Credit Card Information
  4. Drugs
  5. Confidential Patient Information.

Further, Mr. Adners advises that for less-sensitive jobs, employers can check only employment references and educational backgrounds.

Some Falacies in Credit Checking

Companies other than Financial, Healthcare, Government/Contractor, Law Enforcement, and certain IT are running credit checks on job applicants. Many of them likely do not need to do so, because the information is often not predictive of behavior related to the job. In these appropriate cases, the pre-employment credit check is invasive and even useless.

Kiviat, Barbara. Time 1/17/2005, Vol. 165 Issue 3, p70-70

Employers have felt that good credit reports, such as on-time bill payment, reasonable debt load, not too many requests for new credit, and other, indicate that job candidates are

  1. less likely to steal, and
  2. more likely to pay closer attention and show responsibility.

However, recent studies demonstrate that a good credit rating is not necessarily related to productive job performance. A good credit check does not always equal a good worker, or vice versa.

African-American women are becoming increasingly vocal about being denied jobs in light of "bad" credit. This could be illegal discrimination of two EEO protected minorities: women and blacks.

[Note: The above problem scenario could spread to include more Older Workers ages 55+ that are also covered in the AARA Stimulus Package for more work, as that group increases and the younger work 16 - 54 decreases in numbers through 2016. Click here for the story.]

Job Application Advice

I think job seekers/workers are wise to proactively learn and remember their rights at work and in the job application process. To this end, the CreditReport.Com commercials are partially correct in stating that people need to check credit report accuracy - but they don't have to join anything or pay anything. Consumers can receive free reports with no sales gimmicks attached, from major credit reporting agencies.

Generally, a company that denies a person a job on the basis of a credit report must communicate to the applicant that this is the case. The company does not have to list the specific information, however – it is the job applicant's duty to contact credit reporting bureaus and find out. This is time consuming and frustrating, complicating the job search process that is already difficult in any recession. In the case of jobs for which a credit check is imappropriate, the stress is not warranted.

Unfair and Illegal Credit Checks

Ongoing Credit Checks

In working with clients, I found a few companies that ran periodic credit checks on staff. One was a major clothing retailer and this procedure was eliminated when the company was sold, but it destroyed some workers' mental health. I also worked for such a company briefly - it was a small company that gained access to workers' bank records via board members that were bank officials. The business was far in debt and closed quickly, anyway. Before it closed, cost containment efforts were such that employees that had negative credit issues experienced salary cuts, reductions in benefits, and reduction in the number of yearly holidays and sick days; the company management felt that the workers had nowhere else to go and were "stuck.". In addition, one employee wrote a check as a church donation and experienced a wage cut by that amount - monthly.  

If employees do not sign a new release for each credit check, I question the legality of it. Check with your local labor board if this happens to you. [This reminds me of the New York companies a decade ago that went non-smoking and required staff to receive quarterly chest x-rays in order to prove that they were not smoking. That's a large expense, and so are credit checks.]

Unfortunately, I have seen other isolated instances of an employer holding a less-than-perfect credit report over a worker's head as a threat to gain agreement to longer hours without extra pay, pay cuts, or both at once. If this should happen to you, it is wise to consult the local labor board, an attorney, and/or the State Attorney General's Office. This is a type of whistle blowing that sometimes brings its own complications in the job market, but you have the right to fair treatment.

Facts and Common Sense

Credit checks are a common hiring tool for companies of all sizes in the US. Somehow, they have become a standard practice, although states like Connecticut have moved to block this practice. References below are representative of a large number of similar studies.

Credit checks have been used like an employment reference and a "personality" test but are not a good one. The are not consistently predictive of behavior. However, employers often think that they show personality factors and this situation needs to be fixed. Credit checks do not actually show the personality characteristics that employers believe they do.

This is frighening to job seekers and casues suspicion - What are they doing with my information? Job candidates become uncertain about what their credit reports actually contain, depending on who is askingfor it -- is there an Employer Version, a Lender's Version, a Detective's Version, an IRS Version, and an FBI Version? Is there another version just for the summer or job seeker that contains less information? It is diffcult to understand why a potential employer asks for a credit report and how it will be evaluated. The job seeker is at a disadvantage, especially in a recession.

Kuhn, Kristine M.; Nielsen, Marsha L. Understanding Applicant Reactions to Credit Checks: Uncertainty, information effects and individual differences. International Journal of Selection and Assessment, Vol. 16, Issue: 4, December 2008. pp. 307-320. [from EBSCOHOST, membership required, 05/13/09]

Two controlled studies looked at the effects of the explanations received by job seekers about credit reprots and their individual differences - the particular individual way they reacted to the explanations.

Experiment One looked at 408 undergraduate business students and found perceptions to be mostly negative. They read an explanation and thought about their own credit scores before giving their response.

Experiment Two examined students from a non-traditional population (adults, out-of-school youth, etc.) and found similar negative results. However, the person age was related to higher levels of mistrust of credit reports - the older, the more mistrustful. Further, those that did not trust that their scores would be held private by the employer most often stopped the application and interview process.

If these results generalize to all Americans, then 1) those with lower credit scores and higher ages do not want credit checks, 2) although a segment of people just want privacy.

Hansen, Fay and Hernandez, Gonzalo. Caution Amid the Credit Crunch. Workforce Management [Crain's Detroit] 2/16/2009, Vol. 88 Issue 2, p35-39.

'As the recession deepens, employers that routinely include credit and criminal record checks in their screening process should tread carefully to avoid legal trouble."

"There is a renewed risk of discrimination lawsuits, especially for large employers," says Rod Fliegel, shareholder at Littler Mendelson in San Francisco. "Name-brand companies should be particularly concerned," because "name brand" is typically a synonym for "deep pockets." "The risk will rise as more people are out of work," Fliegel says. "It is prudent for employers to take a close look at how they are using credit and criminal-conviction information, especially multistate employers. There should be refinement." ...

Andria Ryan Fisher & Phillips in Atlanta "warns that all employers should maintain strict compliance with the Fair Credit Reporting Act. "I'm shocked by how many employers are not getting applicant authorizations or using the proper notification when an applicant is rejected because of a credit check," she says. "There are a lot of screening companies that are not providing the appropriate forms, and this is not acceptable."'

In addition to the above, federal law and some state laws prevent companies from denying jobs because applicants filed for bankruptcy, It turns out that 1) employee attitudes and 2) turnover rates better predict thefts by workers - much better that bad credit reports.

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Comments 18 comments

Philipo 7 years ago

Thanks


The Good Cook profile image

The Good Cook 7 years ago

Thanks for the great information Patty.


Patty Inglish, MS profile image

Patty Inglish, MS 7 years ago from North America Author

lovezan - Wow! You know, some countries do not do them, I think.

Philipo - Thanks!


New Life profile image

New Life 7 years ago from Chandler, Arizona

I enjoyed your hub, credit checks? People cannot even find a job if they don't pass. What if you have been laid off and could pay your bills on time? You get punished by employers. What if you had a major illiness in your family? You get punished by employers. I have worked in the corporate world for over 35 years. Its a joke! I am glad I grew up.


Patty Inglish, MS profile image

Patty Inglish, MS 7 years ago from North America Author

Hi New Life! - The corporate world can be very hard. Congratulations on the new life you have chosen for yourself.


someonewhoknows profile image

someonewhoknows 7 years ago from south and west of canada,north of ohio

The way things are going ,you might want to check your prospective employers credit!I wouldn't want to be hired by some company only to find out that they are strapped for cash or credit,like the big car manufacturers.I wouldn't feel that the job they are offering me was secure.


Patty Inglish, MS profile image

Patty Inglish, MS 7 years ago from North America Author

Hey, you are RIGHT, someone! I was with an employer once that had a few paychecks bounce, but they got back on track after getting better organized. How about some employers today, though?


Shadesbreath profile image

Shadesbreath 7 years ago from California

I have to admit, some of this was surprising to me. I figured credit scores do reflect, at least to some degree (and in conjunction with lots of other information collected to gather an impression of someone) behavior patterns. I suppose they DO for many, but for some, the score could actually not be reflective. I guess the lesson to be taken from this is the "reliable" part of it. It isn't reliable, even if they are often totally accurate.

But I have to say, the discrimination thing irks the heck out of me. I mean, if you have a bad credit score and the company is screening ALL applicants based on or in part on credit score, how is it "discrimination" if you have a bad credit score. Your race/gender/ethnicity didn't get you your credit score, YOU did. So, if we can put aside the point of whether a credit score is a good way to screen for a moment, I gotta tell you, I hate when everything is turned into discrimmination. This country is so stuck in that old, tired mud.


Patty Inglish, MS profile image

Patty Inglish, MS 7 years ago from North America Author

It will be interesting to see how cases among black women turn out. I suppose it only takes one instance in a company hiring someone without a credit check at the same time turning down someone else on the basis of a poor credit check to begin descrimination action. Sounds like a business in itself, eh?


Shadesbreath profile image

Shadesbreath 7 years ago from California

Yeah, it's big business. I should have been a lawyer. Except I think they actually have to do work and stuff, which would horrid.


Patty Inglish, MS profile image

Patty Inglish, MS 7 years ago from North America Author

No, I think the clients do most of the work. :)


Eric Graudins profile image

Eric Graudins 7 years ago from Australia

A brief digression if I may:

In Australia, it is illegal for credit information to be used in situations where the person wanting the credit check is not giving credit to the person involved.

Consider the situation where someone wants to rent a house.

There is no credit involved in the granting of a lease. Everything is paid for up front, and rent is in advance. Clearly not a credit type situaiton, and in fact our Credit legislation contains a clause specifically prohibiting landlords and rental agencies from obtaining the credit history of prospective tenants.

However, this type of legislation does NOTHING to prevent credit information from being used to select tenants.

If you try to rent a property through an agent, you will be asked to fill in an application form, and provide an up to date credit check.

If a credit check is not provided, then your application is not considered complete, and will not be processed. the loophole is that YOU, not the Landlord is asking for the credit check.

The Law is clearly an ass.

And likewise, for employment checks, if the employer wants any information at all, people will provide it if they want the job.

It sucks - but that's how it is.


Patty Inglish, MS profile image

Patty Inglish, MS 7 years ago from North America Author

Thanks for all that information Eric. The intrusiveness is relentless, isn't it?


Josh Kieser 7 years ago

I don't understand how banks require credit checks for employment when they proballly have the worst credit and bad debts they anyone. The big banks are millions and billions of dollars in debt. How is a couple of $1,000's debt worse then billion dollar debts. The government had to bail them out. They contradicting themselves.


SCOTT A. 6 years ago

WHY DON'T THEY ASK ME ABOUT MY SEX LIFE TOO WHILE THEY'RE AT IT. WHAT IDIOTS!! EMPLOYERS DON'T NEED TO KNOW MY CREDIT SCORE. PERIOD!!


Patty Inglish, MS profile image

Patty Inglish, MS 6 years ago from North America Author

Lots of people agree with you, Scott.

A friend worked in the credit office for a huge major retailer that was owner of about 9 different chains of clothing stores. Not only was a credit check down on new-hires there before hire, but at least every 6 months after that! Turnover was high and lots of job candidates told them to keep their job as well.


saintodd profile image

saintodd 5 years ago from Snohomish, WA

I love your hubs. Informative, clean and fantastic layouts. I enjoy your deliberate additions of news articles and I love the added graphic you use to divide the sections. You are always inspiring. Thank you for posting and for leading the way. I'm a fan. Voted up!


amithak50 profile image

amithak50 5 years ago from India

Thanks for the nice info..

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