“It’s not fair!” So goes the mantra of prospective employees and tenants who have been turned down for employment or renting because of poor credit. Is it fair? What I used to ask my children when they said that was “Why isn’t it fair?” They stopped asking soon after that.
Looking at the responses of job seekers who have apparently been rejected on the basis of a credit report is even more enlightening. A letter to the editor in the Allentown, PA Morning Call in 1999 contained the following: “But to blatantly ask for a credit report, and have your interview determined by some big wig who makes up his own mind based on numbers, is nothing short of an invasion of privacy. It’s sick.” We have to wonder what criteria would be acceptable to this applicant. Certainly job performance, but numbers can play a large part in determining how successful an employee will be in many occupations such as sales and financial management.
A global survey by Korn/Ferry International found, reported in an article in CA Magazine in October 2004, “Education and employment verification were most popular at 83% and 77%, respectively. But a significant number (26%) also cited credit history checks, a screening measure that assumes employees with good credit are more conscientious and less likely to steal or be fired.” But, who is screening using a credit report not fair to?
Is the credit report an effective tool for determining the viability of an employee or tenant? A credit report is most likely a predictor of the likelihood that a tenant will pay the rent on time, and thus, is a valuable tool for use in tenant screening with poor credit a valid and businesslike reason to reject.
The jury is still arguing, though, about how much of a predictor good credit is of someone being a good employee. A study by Eastern Kentucky University professors Jerry Palmer and Laura Koppes, found when they appraised the performance of 178 employees working in financial services that there was no correlation. Without looking at the methodology they used, such as the questions they asked and the people who were interviewed, we can’t determine the accuracy of the survey results. Apparently, some of the evidence was anecdotal, meaning they used examples of individual cases such as the individual who had a number of 30-day late payments on his credit report but still turned out to be an exemplary employee. That proves nothing. It happened once. So what? In order to prove the claim, the study would have to show no or a negative correlation between bad credit and employee success.
What’s more, in the study’s report on page 122, Palmer and Koppes even hedge on their findings, at one point saying, “We cannot be sure that the overall performance ratings and termination decisions captured the constructs of conscientiousness and integrity.” In real-world language that means they don’t know if what they measured correlates with conscientiousness and integrity.
Here’s another wrinkle. The Conference of State Legislatures reported in June 2013 that 26 states have had bills introduced and at least 10 have laws that prohibit the use of credit reports in hiring decisions. Check with your own state or with your screening company to see if your state is one of them. If it is, find out exactly how the law is worded because there may be some leeway in how you can use the credit report.
That brings us to the question, do you want or need to pull a credit report on a prospective employee? Look at what a credit report includes. On the Zip Reports website it shows the following items that appear on a credit report.
- Names: All names the bureau has listed for that specific Social Security Number.
- Security Numbers: All Social Security Numbers reported to the bureau as being used by that applicant. (*See our Verification services for even more in-depth SSN checks.)
- Date of birth*: (*Only displayed if there is a discrepancy between dates reported at different times.)
- Addresses: Includes first reported and last reported dates at each address of residency.
- Employment: At a minimum, lists names of employer companies. Some files also contain employer addresses and employment dates.
- Credit History: Account types and lenders are listed, along with balances due, credit limits, payment histories, durations of accounts, collection status, and other related information.
- Financial Public Records: Civil judgments, bankruptcy filings, tax liens, etc.
- Inquiries: List of companies that have requested credit reports on applicant to consider extending credit. Dates of requests are often listed.
- Remarks: Comments from consumer relating to information provided in report.
Let’s start with “Names.” What might you think if you see multiple names attached to a Social Security Number? Illegal aliens often use the Social Security Number of another person. You could require an applicant to prove he or she is who she claims to be. Obviously, if the woman who applies is using her married name, there is not issue.
What about “Addresses”? On the application, an applicant will list his or her current address and likely a previous address, assuming it is less than two years or so since moving. An address may appear on a credit report that doesn’t appear on the application, though. That would call for further explanation from the applicant. Is that using a credit report in the hiring decision? Probably not since that same information is available elsewhere.
“Employment” is a valuable piece of data. The applicant will list all of his or her previous employers for the last however many years. The credit report might show an employer not listed on the application. That would call for further explanation from the applicant.
Finally, there are the “Inquiries.” Why might that be interesting? It can tell you with whom the applicant has applied for credit and also which other employers might have run credit on your applicant. It might yield nothing interesting, but you never know.
The point of this discussion is that even though in several states it is illegal to base refusing to hire on a less-than-satisfactory credit report, even though it may not prove or disprove the quality of the person you are interviewing, the credit report does provide another avenue for verifying the information an applicant wrote on his resume or application. Verification of the applicant’s information is the first step in careful hiring.
By Robert L. Cain