“I’m trying to think of another industry where a 20 percent error rate would be acceptable.” says 60 Minutes correspondent Steve Kroft, in a new exposé of the credit reporting industry. “That’s a pretty high error rate.”
To say the least.
Kroft was discussing the findings of a comprehensive new study by the Federal Trade Commission, which finds that 21 percent of consumers had a material error on a credit report from one of three major credit reporting companies. While not all of these errors would affect consumer borrowing, the research suggests that as many as 10 million Americans (5 percent of consumers with credit reports) have errors in their credit reports so serious that they would likely pay more for auto loans or other credit -- or would be shut out of credit opportunities entirely. That’s a troubling statistic for borrowers, especially given the tremendous difficulty consumers face in getting errors in credit reports resolved. But the problem with credit reporting errors may be much greater than the numbers suggest.
Regular readers of this blog are familiar with another common use of credit reports: employment screening. As I’ve noted before, about half of employers say they now examine the personal credit history of job applicants when hiring. But unlike lending scenarios where it’s relatively straightforward how much an error damages a consumer’s ability to access credit, the impact of errors on employment prospects are much harder to measure.
The reason? What employers look for in a credit report – and how much they weigh different factors like late bills, foreclosures, or accounts in collection – is completely arbitrary. Employers do not have access to credit scores, but rather written reports listing credit accounts and their status. For one employer on one day, a single late bill could be interpreted as a sign that a job applicant lacks responsibility and can’t be trusted at a cash register. Another employer could look at multiple bills in collection and be reminded of their own difficulty coping with uninsured hospital expenses when their child needed an emergency operation. A credit reporting mistake that is too small to make a difference in applying for credit might nevertheless stand out to an employer – and cost someone a job. As a result, it’s nearly impossible to say how errors on credit reports may impact someone’s employment prospects.
Since nothing on a consumer’s credit report has been proven to predict an employee’s job performance or propensity to steal from an employer or customer, any interpretation an employer makes is entirely subjective. That’s one reason why credit reports are not reliable for employment. And one reason why it’s critical that this week Representative Steve Cohen will reintroduce legislation restricting the use of credit checks for employment purposes nationwide. Cohen’s legislation, known as the Equal Employment for All Act, has garnered the support of dozens of civil rights, consumer, labor and community groups.
In an editorial today, the New York Times suggests additional remedies for addressing credit reporting errors:
[Congress] could require all credit or background check agencies to register with the federal government and to adhere to strict accuracy standards. It could give consumers the right to view all credit information that agencies collect about them. Finally, it could strengthen an existing law that requires that consumers receive notice when they are denied jobs, credit or are in any way disadvantaged by unfavorable credit report information. Sometimes such notices are never sent; Congress should give the consumers the right to sue when this happens.
These are solid recommendations, and they echo suggestions issued by Demos and other consumer experts. But when it comes to employment, accurate and well-disclosed credit reports are not enough. Since personal credit history has no proven relevance to employment, employers and employees would be best served by a complete ban on employment credit checks.