Bad Credit & Unemployment: A Vicious Circle

By Michelle Singletary

Job applicants have to painstakingly pore over their resumes and cover letters because studies show that hiring managers have little tolerance for any mistakes. And now, there’s something else for an applicant to worry about — his or her credit profile.

At the same time the lagging economy is adversely affecting people’s personal finances — and thus their credit histories — employers are scrutinizing the way people pay their bills as part of their screening process.

The U.S. Equal Employment Opportunity Commission is so concerned about this trend that it held a hearing recently to examine the potential impact on workers.

The Fair Credit Reporting Act allows employers to pull credit reports on current employees and job applicants as long as certain disclosures are made. An employer has to get written authorization from the individual to view a report, and then must give the worker or applicant a copy along with a written description of the person’s rights before taking any adverse action based on what is in the document.

The Society for Human Resource Management says job applicants shouldn’t worry too much about credit checks. Although about 60 percent of organizations use credit checks when selecting employees for some jobs, only 13 percent of organizations conduct credit checks on (BEG ITAL)all(END ITAL) job candidates.

“Credit check results are one important component of the hiring decision but are not typically the overriding factor in the consideration of a job candidate,” Christine Walters, a human resource professional and lawyer, told the EEOC.

While some employers may review credit histories thoughtfully, others may automatically screen out all applicants with a weak credit record, testified Chi Chi Wu, a staff attorney at the National Consumer Law Center.

Wu fears that potential employees, especially minority job applicants who are often the victims of predatory credit practices, will not be fairly judged based on their ability to perform a job and will be shut out of employment because of their credit history.

She’s not alone in her concern. Eighteen states and the District of Columbia have recently considered legislation to restrict the use of credit reports in hiring, according to the law center. Oregon and Illinois recently enacted laws restricting the practice.

Wu told the EEOC that it should prohibit or, at the very least, greatly restrict the use of credit reports in the employment process.

“A simple reason to oppose the use of credit history for job applications is the sheer, profound absurdity of the practice,” she said. “Using credit history creates a grotesque conundrum. Simply put, a worker who loses her job is likely to fall behind on paying her bills due to lack of income. With the increasing use of credit reports, this worker now finds herself shut out of the job market because she’s behind on her bills.”

Here’s the underlying question that so far has no definitive answer: Do workers with money troubles have a propensity to steal from their employers?

I couldn’t find any independent research that says yes, if a person has lousy credit, he or she is more likely to embezzle money or accept bribes.

“Although there is considerable research that supports the use of credit scores in making consumer decisions, there is little research exploring the implications of using credit checks in employment decisions,” said Michael Aamodt, principal consultant with the DCI Consulting Group, where he conducts salary equity analyses.

We’ve come to accept that our credit history will be pulled and checked if we want to borrow money. That’s fair enough.

We’ve begrudgingly accepted that insurers set car or home insurance premiums in part based on how customers handle their credit.

Certainly there are some jobs where it does matter how an employee or applicant handles money. Some employers are required to pull a credit report if an employee is going to handle cash or work in a financial services position. At least that makes sense. If you’ve got some major personal cash flow issues, the temptation may be too great. Nonetheless, this trend of employers digging into people’s personal finances is something we should be challenging and restricting.

I’ve worked with quite a number of unemployed individuals whose credit has taken a beating as a result of their loss of income. And now on top of worrying about finding a job, they have to pre-emptively tell a prospective employer about their financial difficulties. Even if they’ve been reckless with their own funds, it’s not something job candidates should normally have to disclose or discuss. It’s really none of the employer’s business.

Get help when you are unemployed and in debt.