Seriously, Why Are You Still Doing Credit Checks on Candidates?
There’s just one thing left to do before officially making a job offer: a credit check. And here’s where things get ugly: your perfect candidate has awful, awful credit. In fact, your candidate had to declare bankruptcy six years ago.
Now what?
Well, ideally, you wouldn’t have done a credit check in the first place — and yet, you did, as do 47 percent of employers. The next step, then, is to totally ignore this information about your candidate’s credit, as it really has no bearing on your candidate’s capabilities. And yet, there’s a good chance you’ll let the candidate’s poor credit prevent you from hiring them: according to a survey carried out by Demos, 1 in 10 unemployed job seekers report losing out on a job due to the results of a credit check. When it comes to low- and middle-income workers with poor credit regardless of employment status, 1 in 7 say they’ve been rejected as a result of a credit check.
And so, you reject this perfect candidate in favor of one less qualified and less passionate, but with a better credit report. Big mistake.
But let’s back up here for a moment: here I am, telling you that you shouldn’t care about an applicant’s credit history while a sizable portion of your colleagues are telling you the opposite. They’re checking credit and letting it influence their hiring decisions. But why?
The Ridiculous Myth of the Credit Score
Long story short, you and other employers are checking credit reports because you want to know how responsible candidates are before you hire them. You believe that a candidate’s credit report is a window into their person — the way they handle money must be a measure of how good/worthy/capable they are, right?
And so, you conflate financial mistakes with moral failures. Bankruptcy? Late fees? Maxed-out credit cards? Clearly signs of a ne’er-do-well. Throw out their application. Onto the next candidate.
Credit checks might make sense if you’re hiring someone for the express purpose of handling your money — after all, you don’t want an accountant who can’t figure out his own finances, much less yours. But for teachers? Receptionists? Chefs? Writers? Marketers? For anyone who isn’t in charge of your cash — credit checks cannot tell you anything of worth.
I’m not just saying that. Read the New York Times article I linked above. Relevant quote, for the lazy: “Jerry K. Palmer, a psychology professor at Eastern Kentucky University, said his studies, though relatively small, found no correlation between the quality of an employee’s credit report and that worker’s job performance or likelihood to quit … He said he was not aware of any studies that showed a correlation between poor credit and employee fraud or violence.”
Still, despite the science (or lack thereof), the wheels keep churning. Employers keep checking credit. (Sadly, this isn’t terribly surprising: pseudoscience is a real problem in the business world.)
Doing More Harm than Good
So, congratulations, hypothetical employer: you just lost out on the hypothetical perfect candidate because you’re following the received wisdom of the industry, rather than the facts. But checking candidate credit is more than just self-harm: it also really hurts candidates themselves, especially the unemployed.
Let’s look at the Demos survey again: “31 percent of households who have had a member out of work for two months or longer in the past three years say their credit score has declined over the same period of time, compared to just 22 percent of those who haven’t experienced extended unemployment in their household. Similarly people from households with someone out of work in the past three years are more likely to describe their credit as ‘poor’ and less likely to describe it as ‘good’ or ‘excellent’ than those that haven’t experienced extended unemployment in their household.”
Similarly, Demos found that 45 percent of people with credit scores below 620 “incurred expenses relating to the loss of a job in the last three years,” compared to 19 percent of those with scores over 700.
It makes sense that unemployment and poor credit would be related: long periods of unemployment mean long periods sans paycheck, which forces people to use more credit at the very moment when they’ll have the most trouble paying back what they borrow. And 2008’s downturn left a lot of people unemployed for extended periods of time, often through no fault of their own. The Great Recession wounded a lot of credit scores, which, perversely, makes it harder for those who lost their jobs during the recession to get hired again.
To make matters worse, credit reports are often unreliable: according to the Federal Trade Commission, 21 percent of American consumers have errors on their reports from at least one of the three major reporting companies. Using credit reports to evaluate candidates means not only relying on a correlation that doesn’t exist, but also using a defective instrument to arrive at the imaginary correlation in the first place.
If it sounds absurd, that’s because it is.
So cut it out already. Credit checks aren’t getting you anywhere. They’re hurting employers and job seekers alike. And if your company is going to stick with the pseudoscience — like so many do — well, then, I can only hope that the Equal Employment for All Act gets us somewhere.