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December 2009 Newsletter

Credit Scores Can Be Harmful to Employers and Job Candidates

Credit is a big issue these days. Whether it is about our financial institutions providing businesses with the capital to expand, or fear that your credit score has been compromised by identity theft, the topic of credit is a media constant. Type in to any internet search engine and the term “credit score” and it yields over 45 million hits.

Most all of the media hype about credit scores is helping people maintain and improve their credit ratings. Those annoying commercials by FreeCreditReport.Com (which are not really free) have heightened consumer awareness of the score's importance.

So, what does this have to do with HR? Plenty.

A few years ago I was consulting with a client on improving their hiring processes.  As part of the client’s screening process was running a credit check. When I questioned some of the HR people why they were doing this, they indicated that it was part of their culture (as a financial institution) not to hire people with poor credit ratings. Digging deeper the rationale was that people with low credit scores are (1) less reliable, (2) more likely to steal and (3) if people can’t manage their own finances how can they be a good steward of the business.

In researching this topic I found that there is no credible published research to demonstrate that credit scores are correlated with any measure of job performance. There is no evidence, for example, that cashiers and bank tellers who steal have a lower credit rating than those that do not. Maybe there are internal company technical reports which can support the use of credit scores as a job related hiring criterion, but I know of none. (If you know of any, please contact me.)

The impact on employers and candidates is enormous. Consider the hundreds of thousands, if not millions, of candidates who may have been wrongfully eliminated from employment. Consider the cost to employers of hiring using a decision tool that is no better than flipping a coin.

Conventional Wisdom at Work

In the absence of evidence to support its use as an employee selection instrument, the question that remains is: why are employers using credit reports to make hiring decisions?

I found this extrapolation of a credit score to predict work behavior an interesting phenomenon. It fits with one our primary motivations—the need to operate in a predictable environment. Psychologists call this an illusory correlation. That is, we tend to see a relationship between two events which in reality are not correlated, or which are correlated to a lesser degree than we believe. We do this in many ways. We stereotype people to provide us with an easy way to predict the behavior of others. We gravitate to indicators that have intuitive appeal, but have no factual basis. And we overestimate the importance of infrequent events in creating these relationships.

If employers want to measure such qualities as employee reliability, integrity and planning and organizing, then I would recommend a number of well developed, researched and documented assessment instruments. Many of these instruments measure conscientiousness, which has been shown to be one of the most consistent predictors of job performance, especially to such behaviors as absenteeism, tardiness, and retention. For about the same cost of running a credit check an employer can use a validated selection instrument measuring conscientiousness as well as a number of other job relevant personal characteristics. If one is really concerned about future employees honesty and integrity, there are specialized assessments that can measure this, too.

There is no need to use a surrogate measure of reliability when more direct and valid  measures are readily available.

Over and above the measurement arguments against the use of credit scores for making hiring decisions, are the business practices and legal aspects.  In 2004 The Society for Human Resource Management reported that 40% of the employers use credit checks at least sometimes.  Certainly, the percentage has risen in the last 5 years.

Employment Law is Catching Up

On the legislative front, both Hawaii and Washington have restricted the use of credit checks to those instances where they have been shown to be job related. In Congress a recent amendment of the Fair Credit Reporting Act, H.R. 3149, is moving through the legislative process.   The bill is designed to “prohibit the use of consumer credit checks against prospective and current employees for the purposes of making adverse employment decisions”.

The EEOC has also entered into the discussion.  The concern of many is that poor credit is disproportional to minorities and therefore, the use of credit scores may adversely affect their employment. For example, in 2000 Fannie Mae found that nearly twice as many African Americans have poor credit ratings as Whites. While the EEOC has not stated a ban on the use of credit scores, they have remarked that such checks “should be avoided” and used only when “the employer can show that such information is essential to the particular job in question”. 

It is good to see that legislation is moving to protect candidates from the use of an unproven selection device. On the other hand, it is sad to see that the scientific and professional practices have lapsed in their responsibility to bring some solid evidence to the table to support or refute the use credit checks as a valid employment screen.

Carl Greenberg, Ph.D.