In the November 26, 2019 Ask The Headhunter Newsletter a reader questions the value of a credit report when judging a job applicant.

Question

credit reportIs a credit report from the big three credit reporting agencies (e.g., Experian) a good proxy for determining if a job candidate would be a security risk? Should a candidate be given the opportunity to explain and provide background about any items on a credit report that may appear as a negative to a potential employer? Or, should the credit check stand as a pass/fail test that a potential employer uses to determine if a candidate might be a security risk?

Nick’s Reply

You’re not asking how to avoid getting rejected for a job because of your credit report, but whether I think this would be justified or wise on the part of employers. We’ll stick to the topic here. If there’s enough interest, we can tackle the “how to” another time.

While we might make a case for employers doing credit checks on job applicants, it makes no sense to me why employers rely on such information to judge whether an applicant might be a security risk — especially not on a pass/fail basis. I haven’t seen any statistics on the actual correlation, much less any suggestion that credit records predict security worthiness. (If someone’s got statistics, please share in the comments section below.) The real risk to the employer is that it loses an otherwise excellent candidate to an assumption that credit behavior correlates with job performance and security worthiness.

Does a bad credit report make you a bad hire?

It might seem silly to make the comparison, but do we reject applicants who’ve been divorced because they are more likely to be bad business partners? Do we reject software developers because they don’t do proper maintenance on their cars? What about people with disabilities? Are they risky hires? Oops. The law protects them. Do you see where I’m going? I think employers should stick first to judgments about whether a candidate can do the job effectively, and second whether they fit the social norms of the organization.

In the U.S. there are laws that govern the use of credit checks on job applicants. Of course, these vary by state. I like Alison Doyle’s rundown on job applicant credit checks.
The challenge is how to assess those characteristics. While I’m not opposed to psychological testing and correlational evidence to make judgments like these, I think HR departments screwed the pooch long ago when they deftly transferred liability for hiring judgments to tests and indirect metrics of character. I believe this is a huge cause of HR’s “talent shortage” problem. These indirect assessment methods cost employers good hires. (See Big Data, Big Problems for Job Seekers?)

Employers need to teach hiring managers how to make better assessments and judgments of candidates directly and personally. It’s an interview skill. But how many companies teach interview skills?

Is your credit report a valid and reliable metric?

I agree that, if a credit check is to be done, the applicant should be allowed to explain the report – but that opens another legal can of worms. The applicant could potentially sue the employer for rejection based on misinterpreting the information. This, of course, is why the employer might use a credit report as a pass/fail metric without disclosing it to you. (For more about this, read my good buddy Suzanne Lucas’s warning to employers, If You Run Credit Checks on Your Job Candidates, Now Would Be A Good Time To Panic.)

Is there any defensible reason for basing a hiring decision on such a data point? It’s hard to make the case that it’s valid except as an indication of credit worthiness (and even that can be questionable). It’s worth looking up “validity” and “reliability” in the context of making assessments. Does a credit check really measure what you need to measure?

Employers have explaining to do

Here’s how I think I prove my point. I’ve never heard of an employee being terminated because the employer checked their credit report. If credit checks are such valid and reliable indicators of security worthiness (or any other job-related requirement), why don’t employers run reports on all employees annually to decide whom to terminate? I think HR has a lot of explaining to do.

Employers try too hard to offload candidate assessment to indirect metrics, and they do a lousy job of justifying themselves. In most companies, it seems HR’s first objective is to offload liability. I think the better practice is for employers to make their interviewing and reference checking more rigorous. To avoid unreasonable risk, make managers very good at interviewing and judging job applicants.

My snarky suggestion to job seekers is to ask a snarky but justified question if an employer brings up a credit check. “Can you show me empirical evidence that my credit report is a valid and reliable metric for judging me as a worthy hire?”

You’d be surprised how many successful people I’ve placed who had questionable “background checks.” It takes a lot more to really judge someone – or you miss some great candidates!

Have you missed out on a good job (or a good job applicant) over a credit check? Have you outwitted a negative credit report when applying for a job? Do you believe credit checks tell employers anything useful about a person? Is someone’s credit report a worthy pass/fail test for hiring?

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45 Comments
  1. What about the employers who feel entitled to snooping around the Facebook page of job applicants:
    https://www.youtube.com/watch?v=eLLV3WGqd4s

    It would be similar to banging on the front door of a job applicant’s home and demanding all their photo albums, in the previous job market era when we used to actually mail our cover letter and résumé to the employer.

    How can they be certain that they have the correct John Smith? Couldn’t it perhaps open the door to discrimination, as they see what you look like? I.e. age, gender, race etc.

  2. Does a bad credit report make you a bad hire?

    Donald Trump

    4 Bankruptcies
    Elected President of the United States

    Apparently the American people didn’t think so.

  3. This makes a lot of sense for anyone who touches the books. A lot of cases of financial fraud are when people get desperate.

    A monthly credit check of all finance employees and their canidates would be a cheap way of reducing the risk of embezzlement.

    It’s quite common in debt management too. If you had bad debts and now have a good record. Then your a better canidate than a spotless record.

    • In US government security clearances, it’s not that you are perfect with your finances but that you are truthful about any financial problems, and that you handle problems with integrity. For example, going bankrupt is actually seen as positive since you resorted to legal means and not to something questionable.

      What they are trying to find out is if you are honest, and that you can handle problems.

      If you do not report your bankruptcy on a security clearance application, however, and the investigator finds out you went bankrupt, that is when your problems begin.

    • @Craig: I don’t buy it. I’d love to see the correlations. Kevin makes a strong point about what it all really means.

  4. As Craig pointed out, this makes sense for people who have access to the books or bank accounts. In fact, many of these positions will require a credit check.

    On the one hand, I can’t fault companies for doing this. Someone up to their ears in debt and behind on payments could find having access to the books and the checks a little too tempting.

    That said, how do you know someone with stellar credit didn’t pay off their debts by skimming from the previous employer? How do you know that someone with great credit today is about to not be able to hide their gambling addiction?

    And how many people in the US have gone into bankruptcy because of medical issues from lack of health care? That right there has *no* bearing on how trustworthy they are.

    The solution to this is not credit checks but good internal controls: requiring two signatures for checks, frequent audits/reviews of records, transparency in the form of multiple people being allowed to see and review accounts, etc.

    I think this is also another area where turnabout is fair play. If a company is going to require a credit check from a candidate, the candidate should get the credit reports for the manager and others. What about the risk of taking a job where the manager or people in the executive suite are skimming things because of *their* debt problems? How do you know your paycheck won’t bounce because they’ve emptied the bank accounts? Sauce for the goose…….

    • The last time I looked at a new job, I had the local librarian run a report on the company to make sure they were in good shape.

  5. Many people with bad credit have bad credit because of medical bills they couldn’t pay. It’s the cause of many bankruptcies.

    They got sick or injured, couldn’t work, and ran up big medical bills all while they had no income.

    From CNBC:
    A new study from academic researchers found that 66.5 percent of all bankruptcies were tied to medical issues —either because of high costs for care or time out of work. An estimated 530,000 families turn to bankruptcy each year because of medical issues and bills, the research found.

    • I found myself more than $150,000 in debt (about four times my annual salary at the time) after two years of cancer treatment. And I had insurance! The U.S. health “care” system will financially ruin almost any ordinary person who does not have extraordinary wealth, but that’s another argument. I filed for Chapter 7 about six years ago, and it saved my life…quite literally. For many people, bankruptcy does not carry the shameful, embarrassing stigma that others think it does. Of course, it matters how you ended up in bankruptcy court–did you have a rare disease or did you spend a fortune at the mall every weekend?–but it truly is a lifesaver. My credit rating went down for about a year and then bounced higher than it’s ever been. Americans don’t realize how lucky they are to have this tool at their disposal. I have friends in other countries with massive debt from the Great Recession and they have no recourse; they will go to their graves crushed by debt and then pass it on to their progeny. I’m always stumped by the attitude that bankruptcy is a clever tool for businesses/corporations, but should be a bitter load of shame for ordinary citizens. I truly believe that by addressing my financial mess and working hard toward turning the ship around, I showed tremendous responsibility, not the opposite.

    • Some in the medical community are outright thieves. One of my friends, was found unresponsive at his mailbox. He was rushed to a local hospital and was treated for renal failure. The hospital didn’t have room in their longterm care facility so they just left him in the hospital. By the time they finally moved him to the longterm care facility, he was ready to be released. He had to fight the hospital and government officials to be released. Keep in mind he was in and out of a coma most of this time due to inadequate care for his diabetes.

      By the time he was released, the hospital sent a bill for over a million dollars. He paid a negotiated price but I don’t see why you should have to pay for someone else’s incompetence.

  6. Nick, thanks for the balanced treatment of this topic. This practice is especially disturbing when situations arise due to health emergencies, job loss or other personal crises, and despite your best efforts to “do the right thing”, you’re still being “punished” for it years later.

    • @Chris: “The solution to this is not credit checks but good internal controls.”

      Bingo. Why do companies try to offload liability and risk to the candidate? You hire a person for their skills, not their failings. If a company operates in a way that permits cheats to cheat it, that doesn’t justify or excuse the cheater, but what does it tell us about the business?

      And I love your idea about turnabout. As Dale suggests, caveat emptor. Check the company’s financial situation in advance. In keeping with Chris’s idea, why not ask during the interview, “Are there any financial problems or irregularities I should be aware of?” Done properly, that might even create an implied obligation on the part of the company.

    • @Rich: You’re right. The bigger issue is the secretive, pass/fail nature of using credit checks to make hiring decisions – there is no recourse or opportunity to explain.

  7. Be aware of those personal data sites that harvest information from government websites. When you google your name sometimes in the search results you will see your “public information” showing your name and address who shares your address and age. Go after them and pull back your information.

  8. Nick, speaking of evidence-based methods of selecting job applicants, do you have any evidence for interviews (your recommended method) working? Because while I haven’t looked in a decade or so, every study as of then said that interviews were about as effective as picking qualified resumes out of a hat.

    • @Carl: I think we’ll never see such evidence because the type of interview varies so much. I’ve seen the studies you reference. A friend of mine is an organizational behavior researcher at a major university. She’s discussed the failure of the “traditional interview” with me, compared to smarter interviews. But what are smarter interviews? I like to think they include/emphasize “can you demonstrate that you can do the job?”

      I think the point is this: A judgment of a person in the context of hiring is a complex thing. I’ve not seen anything but the human brain do a good job with it, even if many brains aren’t up to the task!

    • @Carl

      There was meta analysis done by Hunter & Schmidt that looked at 80-100 years of other studies and basically concluded the closer the interview is to doing the actual job (or measuring the skills directly related to the job) that there was a higher correlation to on the job success.

  9. AS mentioned earlier, U.S. Security clearances rely in part on credit checks. And for many jobs maintaining a clearance is a condition of employment. For those positions passing a credit check is essential to getting selected. And for those positions there are routine follow-ups. It isn’t monthly, but it isn’t “one and done”. You are correct, if it is important for a new hire, it is important a current employee as well.

    AS was alluded to earlier, there isn’t a single pass/fail criteria. Each situation/employee is adjudicated. I had an employee who got in trouble and had bad credit and late bills. She was on the verge of losing her clearance. She took out a loan from her 401K, cleaned up all her bad debt, attended credit counseling, paid off her loan, and kept her job. Not only did she keep her job, but she learned how to handle her finances. It was a close call, but it worked.

    I don’t have the data that relates financial problems to security risks, but I think money plays a role in at lest 50% of all security breaches.

    • Checking credit reports may also help detect spending beyond salary. I read a book by a CIA officer who said they like to pay their sources about 50% of their base salary, not enough to be obvious, but enough that the source would have a hard time walking away.

    • Kevin wrote “I don’t have the data that relates financial problems to security risks, but I think money plays a role in at lest 50% of all security breaches.”

      You have no data but you think money plays a role at least 50% of the time. What made you pick 50%?

      • Anecdotes, which are different than “data”. In my annual security clearance training more than 50% of the case studies presented involve a major financial component. More spies decide to compromise secrets for financial reasons rather than ideological ones (based on the anecdotes). Manning and Snowden are in the minority. But I don’t have a published study with analyzed/verified data to support that observation.

  10. > Do we reject software developers because they don’t do proper maintenance on their cars?

    I read an interview years ago with someone who stated that he’d never hire a software developer that drove a manual transmission. The reason? In his mind, someone who didn’t have a car with an automatic transmission might not want to use the fancy development tools that the company has invested in while on the job. I have to wonder how that company has fared over the years.

    • @Rick: Why would anybody hire a programmer who can’t drive a stick??

    • Wouldn’t that be a bit like not hiring a cook who made everything from scratch? Time-saving shortcuts and quality don’t always go together.

  11. Someone can have bad credit for artificial reasons like closing down a really old credit card they don’t use anymore or suddenly decreasing their maximum credit cap because they are trying to be responsible with money and don’t think they need the ability to accrue $10000 in debt. Someone can also have bad credit because they don’t use credit cards. It’s a silly metric when looked at in isolation.

    I once had a client that was turned down from a good job in his field because he had outstanding child support; it wasn’t a huge amount but he had fallen behind while unemployed. He needed the job so he could afford to catch up on his child support payments. Catch 22.

    • @AA: Dontcha love it when employers want to come home with you? Show me the CEO who opens his or her personal books to the next employee they hire. Sheesh. It’s so insane that it’s a best practice! And nothing but an admission that an employer has no idea how to judge a prospective hire!

    • A NYC “help wanted” sign as reported on “NBC Nightly News” circa 2008:

      ……..HELP
      …..WANTED
      The unemployed
      ..need not apply

  12. What disturbs me, is the fact that some people assume you have to be bad with money or not pay your debts to get a negative credit report. Heck, until a couple of years ago I would have agreed with you.

    There is a growing trend of so-called phantom debt, where scumbag fly-by-night debt collectors buy outstanding debt of dubious quality.

    A couple of years ago, I received a good job offer in another state. So I contacted my landlord and ended my lease early. I paid all fees, documented all payments, documented the apartment check for damage, and the management company put in writing that everything was paid in full and the apartment appeared to be in good condition.

    Fast forward about a year later and I get a call from a debt collector who claimed I owed money on the apartment. I asked for verification of the debt and they stated that the apartment needed to be cleaned. So I faxed them the bill I received from the professional cleaning crew I paid to clean the room. They responded that the bill was for “accelerated rent” whatever in the heck, that is. We went back and forth like this for a year and one day I saw that all of the credit agencies were reporting this debt and noted that it was a “contested amount” as though that helps. This was my only negative mark on my credit report.

    I had enough of their b.s. so I sent a certified letter to the CFPB and copied the dirtbag collection company. I sent in all of my documentation. About two weeks later the collection company cancelled the debt I never owed in the first place and all the credit agencies removed the negative mark.

    Just ridiculous and I have absolutely no faith in credit checks or background checks for that matter.

    As a quick side note, one of my friends hired a temp to manage their customer accounts. The background check came back clean. A few weeks later the company in charge of the background checks called to let the manager know they made an error and the person hired was actually a well known fraudster who had just been released from prison. The error was 100% the background companies error and they had mixed up names. So some innocent individual was not hired due to their mistake and someone who should not be handling sensitive customer’s credit card files was hired. When the manager came to speak with the temporary employee, they apparently knew what was up so they sprinted to the parking lot, hopped into their car, and squealed out of the parking lot. To this day he still tells that story – even though this happened a couple of years ago.

    • Something similar happened to me. A property-management company that handled a very large NC apartment complex claimed that I’d painted my apartment and that they had to pay $2,000 to repaint it. I never painted that unit. It was a clear grab for money (other tenants had serious financial problems with the same company) and they knew there was nothing I could do because I’d moved to Chicago. I refused to pay for something I did not do, especially $2,000 to buy some paint! I “disputed” the charge, which does nothing more than put the phrase “disputed by customer” next to the entry. It sat on my credit report for seven years before dropping off (just last month….YAAAAAY!!!!). The worst part of it all? When you owe money to a property-management organization of any ilk for any reason, it’s hard to get approved for a lease. I’ve been turned down several times for housing because of that single dumbass entry on my credit report. I even had it dismissed in Chapter 7, but even though it then stated “Dismissed in Bankruptcy”, potential landlords still wouldn’t rent to me. Seriously: They had zero problems with my bankruptcy but wouldn’t budge on the black mark from NC. It’s really frightening when you think about what any old Joe Schmoe can slap on your credit report and how hard it is to get off!

    • @Anna: Wish I’d saved it. A couple of years ago Wired published a long-form story about how bundles of debt are bought, sold, rented and re-sold again and again by collection agencies. People who’ve paid off debts through a collection agency find they are assailed again by another agency that bought the debt in another bundle. Doesn’t matter whether you paid — the onslaught can continue. We won’t even get into identity theft as a cause of bad credit reports. Employers make a whole lot of insupportable assumptions while neglecting to learn how to actually judge a job candidate.

  13. There’s also another factor: people who are unemployed, especially for a long time, develop credit problems. Thus, screening people out for bad credit becomes, in essence, a “debtor’s prison.”

  14. I have a relative with the same first, middle, and last name and approximate age and lives near me. He has a criminal record for a series of minor offenses and and one relatively serious theft offense. I tried applying for a position near him and was rejected. Was it because of same name or my qualifications? His theft offense made local headlines.

    • @Mike: I have a similar problem. I’ve been pursued by collection agencies that rely on a name with no other identity-confirming information. I’ve been lucky not to suffer any permanent consequences but I can imagine where ridiculous errors could lead.

  15. In as much as we can try to understand reasons why and how credit checks and the like are used indiscriminately, the real issue here is the “power” of authority given to HR, or anyone in a hiring capacity.

    I love this: “indirect metrics of character” — just who is determining the parameters in which to judge a candidate? And if for a candidate, why not all employees, whose background may have changed years after initially being screened/hired?

    We all make mistakes, have issues, difficulties, whatever; usually there’s more to the story than the gatekeepers are privy to. And we all fall short at times. Could be that the HR person who rejected your candidacy on Tuesday filed for personal bankruptcy on Monday.

    Smoke and mirrors I always say.

    • @Face: “just who is determining the parameters in which to judge a candidate?”

      Right back atcha. Who decides? Who establishes the parameters and where is the justification and defense? Even in the classic case where the job “involves handling money,” how does a bad credit record predict whether the person will steal the money? “It’s obvious” just doesn’t cut it any more than does “She’s of this or that race” or “He’s from that family.”

      As you note, the fundamental problem is who has the authority and why.

      Let such an employer run credit checks on all employees and managers executives (let’s not forget the board) and apply the same “pass/fail” rules. The problem here is a failure to manage hiring properly and the tendency to pawn off liability to a “best practice” that is at best lazy wishful thinking.

  16. So what ever happened to good old fashioned “trust your gut” when vetting and hiring job candidates? This is another example of more window dressing for lazy managers and HR people to disqualify candidates. 29 years ago, I hit a rough patch of unemployment, and had to file Chapter 7 bankruptcy. Granted, I had far too much consumer debt, and I was as guilty as the creditors who dished out credit terms like candy. I was interviewing for a job by a company and received a call from said company 20 minutes after leaving the interview telling me that I was rejected as a candidate due to “credit”. This was for an entry-level operations position, not for a bean counter position, so I was a little puzzled. I called the HR woman who had interviewed me and politely, but firmly, told her I thought that was rather rude. She just laughed at me, which just added insult to injury. This company is now long out of business. Today, my credit score is right at 800, but I’ve been rejected by insurance companies when trying to switch my home/auto policy to a new carrier because my credit score is “not good enough” (??). Go figure.

  17. More from the world of not making sense–According to Consumer Reports magazine, a driver with DWIs and other violations on their license but with excellent credit will pay less in car insurance premium than a driver with no vehicle offenses and no accidents but less than great credit. A few states do not allow auto insurance companies to set rates based on credit reports. All states ought to outlaw this practice.

  18. Funny, because I’ve been suspecting the opposite for quite some time: that a great credit score would actually hurt your chances of employment. If you’re debt-free then it could be even worse.

    Sounds paradoxical? Not really. All else being equal, employers tend to favor candidates who they feel will stick around in the same company long-term. Those who have serious committments (marriage, kids, debts, or all three) typically fall into this category. Those who seem, more or less, financially independent would undoubtedly get more scrutiny as to WHY they want to work there in the first place.

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