Some good news for job seekers with bad credit
Low credit scores can hurt consumers in everything from getting a loan to finding a job, at least that’s what conventional wisdom has held.
Turns out, when it comes to looking for a job, a bad credit rating may not be the red flag many feared. Even though more and more employers are relying on credit scores to verify the suitability of job applicants, there is scant evidence that a checkered credit history is actually hurting people in the workforce. , according to a new study economists from Princeton University, the University of Chicago, the Federal Reserve Bank of New York, and the Social Security Administration.
The use of credit scores for hiring has become an increasingly hot issue for lawmakers and public policy advocates. Critics have argued that the widespread tendency to check applicants’ credit scores creates unfair hurdles for Americans trying to get back on track.
Several states have banned the use of credit checks in the hiring process, including California and Vermont. But these efforts may be in vain because no research has found that a bad credit score compromises a person’s prospects in the job market, according to the newspaper.
Credit reports “have limited impact on results when a wide range of additional information is available, such as hiring decisions,” the authors wrote. “Our results also indicate that recent policy attempts to limit the use of credit reports by employers are unlikely to affect labor market outcomes, positively or negatively, for target populations.”
Bankruptcy filings allowed researchers to examine whether credit scores could lead to different outcomes in the labor and loan markets. The two types of bankruptcy available to consumers – Chapter 7 and Chapter 13 – keep “flags” on credit reports for different lengths of time, 10 years and 7 years, respectively. This allowed researchers to track what happened after the removal of credit indicators at different points in consumers’ lives.
In what will be a relief for consumers with poor credit or a history of bankruptcy, no difference has emerged in terms of wages or employment after the flags were cleared from consumers’ credit histories.
There are a few caveats, however. On the one hand, the researchers looked at the impact on those who filed for bankruptcy over a short period of time. Since most Americans are not frequently looking for work, the study might not identify longer-term impacts.
More importantly, credit scores matter – in the credit market, the researchers noted. Bad scores can affect a person’s ability to get a mortgage and lead to lower credit limits on credit cards, for example.
Yet employers who research a candidate’s credit history can look at more than just a credit score. About half of employers perform credit history checks during the hiring process, the Society for Human Resource Management found in a 2012 survey. The two main motivations are to prevent theft and embezzlement and to reduce their liability for negligent hiring, according to the survey.
Of course, many other problems besides bankruptcy can show up on a credit report. Debt collection accounts, pending judgments and a high debt-to-income ratio are red flags that employers said they would be more worried about than bankruptcy, according to the 2012 survey.
Even so, job seekers are likely to have a chance to explain themselves, given that around two-thirds of companies said they would not make a hiring decision until they’ve cleared the deal. the candidate to discuss their credit history.
Overall, the research is good news for job seekers with uneven credit. But the treatment they might receive in the debt market is another story.