Can Bad Credit Still Cost You a Job?
CNBC.com News Editor
The recession left a lot of people with bad credit — even people that previously had sterling credit. So, are hiring managers now willing to overlook bad credit or can it still cost you a job?
“I’ve always de-emphasized the credit report,” said Greg George, who does a lot of background checks and due diligence with his firm GTI Advisors. “People face various challenges in life from business failures and layoffs to medical bankruptcy and other issues that may cause/reflect financial distress. This does not mean that they are bad people or necessarily a risk.”
In fact, he said, when it comes to the entrepreneurs he investigates for venture-capital clients, bad credit can almost be a good thing.
“If you understand how entrepreneurs think — they go through one start-up. Blow that up. It’s a lot of work,” George said. “This one individual I was doing a background check on had two bankruptcies. And the investor looked at me and said, ‘that just means he’s more experienced!’”
In fact, he advises clients to not weigh heavily on a credit check — especially in places like Michigan that were hard hit by the recession. What’s more important is to verify the person’s identity — their name, previous employers and where they went to school. It’s also important to check for any legal red flags such as lawsuits against the person for fraud, George said.
Chris DesBarres, who owns Help Unlimited, a company that helps individuals, mostly senior citizens, manager their day-to-day finances, said he uses credit checks when making hiring decisions – but only after he’s decided he wants to hire someone.
“As a screening tool, a credit check is a horrible — and expensive — method,” DesBarres said.
When he does use credit checks, DesBarres said, he’s looking for four key things: The amount of debt the person is holding, any bankruptcies, recent red flags such as maxing out credit cards and any debts that are now in collection.
Many companies limit use of credit checks to positions that include fiduciary responsibilities.
Since the recession, several states have passed laws limiting the use of credit checks during the hiring process, supplementing protections outlined in the federal Fair Credit Reporting Act.
Aside from the fact that people with previously sterling credit might have had their credit dinged during the recession, Connecticut state lawmaker Matthew Lesser, in pitching legislation to limit use of credit reports, offered another argument: “Bernie Madoff had a pretty good credit score.”
A survey last year by the Society for Human Resource Management showed that 60 percent of employers do credit checks for some job candidates, while just 13 percent did it for all candidates.
Jay Meschke, president of executive-search firm EFL Associates, said his clients have started to loosen their standards when it comes to credit checks — but not for everyone.
“Since the downturn in the economy and since people have been losing their jobs and being unemployed for long periods of time, hiring managers have lessened their historical standards vis a vis what the credit report might tell about a candidate,” he said, also citing Detroit as an example.
However, those looser standards only go so far up the food chain.
“For executives, the historical standards still apply,” Meschke said. He cites two reasons: First, the unemployment rate for people with a college education is a lot lower — more like 4.8 percent, compared to the overall unemployment rate of 8.8 percent. So, executives would be less likely to be hit by the effects of unemployment. Second, they make a lot more money than most people, so they should have a nest egg to carry them through any periods of unemployment. If they don’t, and they manage their personal life that poorly, why would you hire them to manage your company?
Recognizing that there’s a difference between a person who lost their job during the recession and wound up with bad credit and a person who has always had bad credit, the credit-reporting agencies recently tweaked their scoring methodology.
They use a system called VantageScore to determine a person’s credit score, which takes into consideration a person’s payment history, how much they use their credit cards, if they carry a balance, how long they’ve been using credit cards and how much credit the person still has available. VantageScore 2.0, which launched at the beginning of 2011, blends data from two different timeframes — 2006 to 2008 and 2007 to 2009 — in order to distinguish those people who may have been fiscally responsible before the recession but fell on hard times in the past few years.
“By using a development sample from this extended window, VantageScore 2.0 captures both a broad and recent set of consumer behaviors across the full spectrum of economic events, reducing algorithm sensitivity to highly volatile behavior that can be found in a single timeframe and extending performance stability over time,” VantageScore said in a statement.
Regardless, Meschke said, hiring managers need to dig a little more nowadays to vet a candidate, not just take data from a background check at face value.
Meschke recalls one of his clients, a hospital, that contracted him to help find a chief nursing officer. They found a great candidate but learned through the background check that she had once declared bankruptcy. The job involved some financial responsibilities, so they almost didn't hire her. But, after they looked into it, they learned that the candidate and her family had taken in their grandparents and also taken over the loan on the grandparents’ house. Then, one member of the family lost their job and they had to foreclose on the grandparents’ house, sending the family into bankruptcy. The hospital gave her a second chance and the woman got the job.
Not only are people with bad credit being given a second chance in many cases, there’s also a camp that’s in favor of hiring those with bad credit.
“I’ve heard an argument that hiring someone with bad credit can be a really smart move — that employee really needs the job and will stay longer,” said Bonnie Zaben, the chief operating officer of media-recruiting firm Aclion. “It cuts down on employee turnover, which can be a real cost saver. Using the conventional wisdom that the costs of turnover is 150 percent salary, you’ve now saved a bundle by retaining that employee,” Zaben said.
One thing most hiring managers can agree on: Candidates who might have a blemish in their credit history need to volunteer that information and an explanation of what happened as quickly as possible.
“Don’t just hide behind it … Leaving it up to chance is a bad decision for a candidate,” Meschke said. “They will find out about it. It’s just a fact.”
Employers are more receptive to hearing an explanation than most candidates think.
"If you can give me a plausible explanation about why this derogatory information should not be a cause for concern, I’m more than happy to hear it,” DesBarres said.
More on Credit Scores: