Discrediting Workers: How Credit Reports are Distorting the Job Market, Prolonging Unemployment, and Denying Equal Opportunity to Workers

Discrediting Workers: How Credit Reports are Distorting the Job Market, Prolonging Unemployment, and Denying Equal Opportunity to Workers

October 28, 2010
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Economic insecurity has become the “new normal” in America. Ten million Americans are out of work, and the vast majority of Americans have seen their incomes stagnate or decline over the past decade. Demos’ extensive research on credit card debt among middle- and low-income households has found that most indebted families go into debt to pay for basic expenses: groceries, utilities, child care, and health care. Simply put, Americans are borrowing to make ends meet. Credit card companies’ own practices have exacerbated the problem, with well-documented abuses that increase fees, rates and penalties — making it even harder for the average American family to keep a blemishless credit history.

Against this backdrop of troubled family finances, there has been a dramatic increase in the marketing and use of consumer credit reports for a purpose completely unrelated to extending credit: employer decisions to hire or fire workers. Employer surveys conducted by the Society of Human Resources Management (SHRM) suggest that over the last 15 years, employers’ use of credit reports in hiring processes has gone from being a marginal practice, one used by less than one in five employers in 1996, to a commonplace one used by 6 out of every 10 employers in 2009.

This increase in employers’ use of credit-history information to make hiring and firing decisions comes despite strong evidence that credit checks have no validity in predicting job performance, and warnings from the Equal Employment Opportunity Commission that the practice results in discriminatory hiring and firing decisions that violate civil rights and deny equal opportunity to workers. If America is the “land of the second chance” and committed to equal opportunity, it’s hard to think of a practice that flies more in the face of this than letting employers deny jobs to people on the basis of their credit history. Congress should act now to end the unfair and arbitrary use of credit reports to make hiring and firing decisions. Especially in today’s economy — with a nearly 10 percent unemployment rate and a doubling over the last four years in the share of outstanding debt balances that are delinquent — the stakes for American workers are too high to allow employers to outsource hiring decisions to credit reporting agencies. The following brief addresses key myths that industry representatives have perpetuated in support of this practice and recommends a federal ban on inappropriate uses of credit reports in employment decisions.