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Another Hurdle for the Jobless: Credit Inquiries

Digging out of debt keeps getting harder for the unemployed as more companies use detailed credit checks to screen job prospects.

Credit Report
CNBC.com
Credit Report

Out of work since December, Juan Ochoa was delighted when a staffing firm recently responded to his posting on Hotjobs.com with an opening for a data entry clerk. Before he could do much more, though, the firm checked his credit history.

The interest vanished. There were too many collections claims against him, the firm said.

“I never knew that nowadays they were going to start pulling credit checks on you even before you go for an interview,” said Mr. Ochoa, 46, who lost his job in December tracking inventory at a mining company in Santa Fe Springs, Calif. “Why would they need to pull a credit report? They’d need something like that if you were applying at a bank.”

Once reserved for government jobs or payroll positions that could involve significant sums of money, credit checks are now fast, cheap and used for all manner of work. Employers, often winnowing a big pool of job applicants in days of nearly 10 percent unemployment, view the credit check as a valuable tool for assessing someone’s judgment.

But job counselors worry that the practice of shunning those with poor credit may be unfair and trap the unemployed — who may be battling foreclosure, living off credit cards and confronting personal bankruptcy — in a financial death spiral: the worse their debts, the harder it is to get a job to pay them off.

“How do you get out from under it?” asked Matthew W. Finkin, a law professor at the University of Illinois, who fears that the unemployed and debt-ridden could form a luckless class. “You can’t re-establish your credit if you can’t get a job, and you can’t get a job if you’ve got bad credit.”

Others say that the credit check can be used to provide cover for discriminatory practices. Responding to complaints from constituents, lawmakers in a few states have recently proposed legislation that would restrict employers’ use of credit checks. While some measures languish, Hawaii has just imposed new restraints.

Business executives say that they have an obligation to be diligent and to protect themselves from employees who may be unreliable, unwise or too susceptible to temptation to steal, and that credit checks are a help.

“If I see too many negative things coming up on a credit check, it’s one of those things that raises a flag with me,” said Anita Orozco, director of human resources at Sonneborn, a petrochemical company based in Mahwah, N.J. She added that while bad credit alone would not be a reason to deny someone a job, it might reveal poor judgment.

“If you see a history of bad decision-making, you don’t want that decision-making overflowing into your organization,” she said.

More than 40 percent of employers use credit checks at least sometimes, according to a 2004 survey by the Society for Human Resource Management, up from 25 percent in 1998. The share has almost certainly risen today, say career counselors.

“It has been an ongoing and increasing issue,” said Mollie de Rojas, district coordinator for the local operations of the Ohio Department of Job and Family Services.

Credit counselors, worker advocates and the unemployed contend that a credit check is not always relevant to hiring decisions.

“There’s no relationship between being a personal trainer making $12 an hour” and having a good credit history, said Janet L. Newcomb, a career counselor in Huntington Beach, Calif. “People are being turned down for jobs on the basis of things that really have nothing to do with qualifications.”

That is the complaint of Kevin Palmer, 49, who for months lived at the same homeless shelter in Santa Ana, Calif., as Mr. Ochoa. After an interview that seemed to go well one day in June at a property management company, a manager walked him around the office the next day, introduced him to other employees and showed him an available desk.

A credit check later, the offer vanished.

It was “a glorified clerk’s job, taking homeowners’ complaints,” Mr. Palmer said of the opportunity, which paid about $39,000 and could have gotten him back on his feet after losing his condominium to foreclosure and filing for bankruptcy.

Last month, he says he found a job at a property management company in San Francisco — a company that did not run a credit check on him.

Legal questions

It is generally legal to run credit checks on job applicants, but some states have restrictions. In Washington, which has perhaps the most stringent requirement, a candidate’s credit history must be substantially related to the job under a law that took effect in 2007.

Last month, lawmakers in Hawaii approved a measure that generally allows an employer to review a credit history only after making an offer and requires the credit check to be “directly related” to job qualifications.

In California, Gov. Arnold Schwarzenegger vetoed a similar law. (New York law requires a background check’s findings to be related to the job, but it addresses criminal records and does not mention credit checks.)

Lawmakers in Michigan and Ohio have proposed barring employers from using credit history in making employment decisions.

“In my opinion, it’s discrimination,” said Representative Jon Switalski, the Democrat who proposed legislation in Michigan. “If you miss a few payments or you have medical debt, your skills as a pipefitter or an electrician don’t diminish.”

Courts have not been sympathetic to claims that discrimination is being cloaked in credit checks, said Angela Onwuachi-Willig, a law professor at the University of Iowa. “At what point does the fact that someone lives in a particular neighborhood or someone has a bad credit score become a way of eliminating people for illegal grounds?” she asked rhetorically. “Basically, the courts don’t protect against proxy discrimination.”

Stuart J. Ishimaru, the acting chairman of the federal Equal Employment Opportunity Commission, said the commission would probably issue guidance on the proper use of credit checks. Such guidance, though nonbinding, could offer some reassurance against lawsuits to employers who comply.

“It’s something that intrigues us and worries us,” Mr. Ishimaru said, adding that some job-related tests had led to discrimination claims in the past. “The question is, why do you use it? How is this a good screening device?”

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Federal law requires employers to get the consent of job applicants before running credit checks, said Pamela Q. Devata, a lawyer in the Chicago office of Seyfarth Shaw.

And if they are considering denying someone a job based on a check, she said, “they have to notify the applicant.” That is intended to give someone a chance to explain circumstances or spot erroneous information.

When the job market improves and fewer people are fighting for slots, credit histories may become less important, said Michael C. Lazarchick, a career counselor in Pleasantville, N.J. “But these are lean and mean times.”

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