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How Employment Credit Checks Perpetuate Poverty and Discrimination

Spotlight on Poverty and Opportunity

“Must have good credit.” 

The phrase appears in help wanted ads for well-paid jobs as accountants and insurance agents, but also for low-wage positions as dog walkers, retail sales associates, restaurant servers, and maintenance workers. If a job applicant’s debts are high, they’ve suffered a foreclosure or a bankruptcy, or they’ve simply struggled to pay bills on time, a prospective employer can legally hold these flaws in personal credit history against them. The process may turn down well-qualified job-seekers—a devastating prospect for a household already finding it difficult to make ends meet. The truth is, the very practice of employment credit checks reinforces inequality and can perpetuate poverty and racial discrimination.

Employment credit checks are common for a wide range of positions. Nearly half of employers surveyed by the Society for Human Resources Management in 2012 say they check credit when doing at least some of their hiring. My own research, a study of low- and middle-income Americans with credit card debt, finds that within the survey population, one in seven job applicants with blemished credit reports say that they have been turned down for a job because of their credit. 

Despite their pervasiveness, credit reports – a product developed to help lenders make loan decisions – have never been proven reliable for employment. Credit checks are marketed to employers as a means to gauge an applicant’s character, sense of responsibility, or likelihood to commit theft or fraud. Yet there is little peer-reviewed evidence to back up these claims. A spokesperson for TransUnion, one of the major credit reporting companies, even admitted: “we don’t have any research to show any statistical correlation between what’s in somebody’s credit report and their job performance or their likelihood to commit fraud.”

My research on low- and middle-income households carrying credit card debt finds that poor credit is associated with factors that may reflect the weak economy or a debtor’s personal misfortune but have little to do with how well a job applicant would perform at work. I found that households with flawed credit history are more likely to have experienced household unemployment, lack of health coverage in their families, and medical debt. In other words, many people run up debts because they have been out of work or have high medical bills, not because they are necessarily irresponsible people who cannot be trusted on the job. High error rates in credit reports means that a job applicant may not even have incurred the debts found in their credit history.