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Are credit reports still a good tool for hiring decisions?

July 31, 2012

Article courtesy of SBAM Approved Partner AdvanceHR

A recent survey of 544 human resource professionals by the Society for Human Resource Management (SHRM) confirms that the use of credit checks in the hiring process is still commonplace — although somewhat on the decline. “Good riddance” would be the response of employee advocacy groups, who complain that the practice gives employers an excuse to kick people when they’re down.

“Credit checks exclude qualified applicants — including people whose credit was damaged as a result of medical debt, divorce, layoffs, predatory lending, identity theft, or other events beyond their control — from the employment they desperately need,” maintains to Amy Traub, an analyst for Demos, a policy research group.

Equal Employment Opportunity Commission Discourages Credit Checks

Perhaps more importantly, the U.S. Equal Employment Opportunity Commission (EEOC) also frowns on credit checks and related investigations. The following statement appears on this page of EEOC’s website: “Inquiry into an applicant’s current or past assets, liabilities, or credit rating, including bankruptcy or garnishment, refusal or cancellation of bonding, car ownership, rental or ownership of a house, length of residence at an address, charge accounts, furniture ownership, or bank accounts generally should be avoided because they tend to impact more adversely on minorities and females.”

The EEOC does concede that such inquiries can be justified in some situations however. “Exceptions exist if the employer can show that such information is essential to the particular job in question,” the Commission states.

Current Employer Practices

So what are current employer practices with regard to credit checks in the hiring process? Following are some highlights of SHRM’s latest survey, which may reassure the EEOC that employers aren’t going overboard.

  • 47 percent of surveyed employers do use credit checks as part of their employment process for at least some job candidates. In a survey two years earlier, that proportion was considerably higher — 60 percent.
  • Few (13 percent) of surveyed employers use credit checks for all job candidates (19 percent reported doing so in a 2004 SHRM survey).
  • Of employers using credit checks today, almost none (2 percent) order a credit check prior to an interview with the job candidate. Most (58 percent) do so after making a contingent job offer, and one-third do so following the interview.
  • Employers’ top reasons for using credit checks include “to reduce/prevent theft and embezzlement or other criminal activity (45 percent), “to reduce legal liability for negligent hiring” (22 percent) and “to assess the overall trustworthiness of the job candidate” (19 percent).
  • Most organizations that use credit checks focus on job applicants’ credit history over the past 2-7 years.
  • Turning up negative information on a job candidate doesn’t always doom a job applicant to being rejected; 20 percent of surveyed employers report having hired them despite a bad credit report.

In keeping with that last result, the SHRM data suggests employers don’t consider credit reports the final arbiter of a job candidate’s credentials. For example, 64 percent of employers say “in certain circumstances” they give job candidates with bad credit reports the chance to explain the results of the negative report, before they make a hiring decision.

Credit Reports in Perspective

As noted, most employers that use credit reports use them only when filling certain kinds of jobs. Almost all (87 percent) use them for jobs “with fiduciary and financial responsibility” involving handling money and accounting matters, whereas almost none (2 percent) bother to use them for job candidates “who will work with children, the elderly, the disabled and other vulnerable populations.”

Besides fiduciary positions, the most common jobs subject to credit checks include senior executive positions (42 percent), jobs with access to confidential employee information (34 percent) and positions involving “access to company or other people’s property” (25 percent).

Where do credit check results fit into the broader scope of job qualification criteria? Fairly low on the list, it turns out. SHRM asked survey respondents to rank nine hiring criteria. As one might expect, top criteria included “previous work experience directly related to the job” and “a good fit with the job and organization.”  Favorable background check results came in dead last on the list, after favorable criminal background check results and “certifications directly applicable to the job.”

If your firm uses credit reports in hiring decisions, there is value in the information that can be found. But as in all areas of life, keep the information you find there in perspective, especially in an economy where financial difficulties are common and not necessarily an indication of character or responsibility.

SBAM can help you make good hiring decisions using pre-employment screening services beyond credit checks.  Click here for more details.

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