U.S. Equal Employment Opportunity Commission


Statement of Dr. Richard Tonowski
Chief Psychologist

The use of credit history poses an important set of questions affecting employment opportunity. I thing that today’s presentations establish that we understand some of the issues, but there is a lack of theory and data that would provide a complete picture. Some of these questions, and what I believe to be the tentative answers, are as follows:

Does use of credit history have the potential for unlawful discrimination?

We have heard that there are differences in credit ratings across race and ethnic groups, and these differences may be compounded for women. There are differences across groups in having well-paying jobs and having insurance to cushion catastrophic financial impact, thus increasing the probability of lower credit rating and higher indebtedness. I would add that these circumstances might also impact those with disabilities.

However, we have also heard that while most employers assess credit history in some way, it is not the same way, or for all jobs. Most are not interested in a credit score. Practices may vary according to the type of financial information sought; the exclusion of items outside an applicant’s control, such as medical expenses; the time period preceding the employment application for that information; when in the selection process the information is used; and consideration of the applicant’s explanation for negative information. Regarding potential applicants, we have no data on who may be deterred from applying due to anticipated rejection because of credit history. Accordingly, gross demographic statistics regarding credit ratings may not be informative; but there does not seem to be better data available.

Why do employers look at credit history, how useful is the information, and what are the alternative information sources?

There appear to be several distinct reasons.

Identify productive employees. There is very little evidence that credit history is indicative of who can do the job better. Presumably directly considering job-relevant competencies would satisfy this need, and have a better track record for being useful.

Identify reliable employees. Reliability can include faithfully showing up for work and attending to the job, and also refraining from disruptive or dishonest behavior. A lack of reliability might be mediated by the stress caused by one’s financial situation. We heard that there is some evidence that credit history may correlate with these considerations. Similar results might be obtained through personality tests or their close cousins, integrity tests. Current conventional wisdom is that these tests are generally free of adverse impact regarding any protected class. However, more recent research and the enforcement activity of this agency are moving toward a less optimistic view. Also, these tests screen out people who tend to be careless in aspects of their employment. They may not do much to screen out people who would engage in calculated criminal activity.

Confirm employment history. Getting complete and honest information from applicants and their previous employers is not always easy. There are a number of reports that document the extent of omissions and inaccuracies in applicants' resumes, and employers are reluctant to provide information beyond the basics of employment history for fear of lawsuits. A credit report can confirm basic information, such as Social Security number, residences, and perhaps previous work. It would seem, though, that this is not actually use of credit information, and might be obtained from background screening providers without the applicant’s financial details.

Identify those with incentive for major fraud or theft. This is perhaps the most problematic use, because—fortunately—serious crime is likely a rare event for most employers. It is thus hard to establish a predictive relationship between credit and crime. Studies mentioned today have shown that aspects of poor credit history can often be seen in the background of the perpetrators. But we know this after the crooks are caught. We seem not to have good data on employees with similar financial need, but who successfully restrained their greed. The issue of false positives when assessing for infrequent events means that people who would have been good employees are screened out to an unknown extent. We apparently have no standard way to assess risk in this area; and it would not be surprising if employers would want to minimize risk where a single event is a catastrophe to the company, customers, or people for whom the company was holding sensitive information. The potential for catastrophic loss due directly to fraud or theft, or indirectly to negligent hiring suits, may not be confined to specific firms, or to specific industries. But it would also seem that opportunity to cause such loss would be limited to specific jobs.

Not mentioned today was the role that security and monitoring systems would play in deterring even those easily tempted. The need for conducting credit checks depends on the opportunity for wrongdoing on the job. There is some evidence that reliance on screening applicants without monitoring employee activity has limited effectiveness in preventing dishonest behavior. Accordingly, the use of credit checks should be considered along with deterrence and detection. The optimal balance of background checking and security measures, both fallible systems, is another area where we do not know enough.

Our knowledge is incomplete, but the presentations today have provided a start for assessing the impact of credit checks on equal employment opportunity and their responsible use by employers.