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What is the Purpose of Pre-Employment Credit Checks?

Updated on May 4, 2012

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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