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Credit scoring and unemployment

Credit scoring and unemployment

Last updated on: July 22, 2010 at 5:17 pm by Fred Clark

Credit scoring and unemployment 2010-07-22T17:17:47-04:00 Fred Clark

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The previous post arose from things I came across while failing to find what I was looking for. I was trying to find concrete data on the reportedly increasing use of credit "scoring" by prospective employers and its relation to the disturbing trend of very long-term unemployment.

Because the two trends seem to me to be related — like the two sides of a vise.

MSN Money's Liz Pulliam Weston says a survey of HR managers found the use of credit-checks in hiring had increased from 25 percent in 1998 to 43 percent in 2006. Weston also describes the elegantly nasty conundrum this creates for those who lost their jobs in the global financial crisis:

Many Americans these days are discovering the Catch-22 of unemployment. And that is: You might fall behind on your bills because you've lost your job, and you might not be able to land a new job because you've fallen behind on your bills.

[Update: Three grafs snipped here from original post. See below.*]

This is cruelly Kafkaesque. It's also bad for employers, arbitrarily reducing the size of their pool of qualified potential employees. And it's hindering economic recovery, prolonging the revenue-loss and the expense of unemployment, hobbling economic growth and therefore, yep, reducing the overall number of new employees being hired.

The credit agencies claim that this service they're selling of credit-checks on job applicants can reduce employee fraud and workplace violence.

Asked to provide evidence of this claim, they repeat the assertion in a much louder voice and remind us that fraud and workplace violence are undesirable.

Which is to say they have no evidence for this claim and that there is no evidence for this claim. It's just something that Transunion, Equifax and Experian hope that their corporate clients will come to believe if they repeat it often enough.

Andrew Martin of The New York Times pursued this point back in April, producing a dark comedy of twisting evasions from representatives of the credit agencies. (See: "As a Hiring Filter, Credit Checks Draw Questions.")

So why, then, is something cruel, self-defeating and broadly destructive becoming more widespread?

A big reason, I suspect, is the foolishness I was mocking in the previous post that leads many to prefer the misplaced concreteness of quantitative measures — evenly patently absurd and arbitrary ones — over qualitative judgments.

Judgment requires effort and many people are lazy. Judgment requires confidence and decisiveness and many people lack those.

Judgment also requires one to take responsibility for one's decisions — and here we come to what seems to be the primary selling-point for the credit agencies.

"Every time you hire a new employee, you put a lot on the line," an Experian brochure reads. "The wrong decision could jeopardize your firm's assets, reputation or security."

That sales pitch has nothing to do with any actual risk to a firm's "assets, reputation or security." It has everything to do with shielding clients from blame for hiring decisions that don't work out well. This is really what they're selling — an insurance policy against blame for hiring the wrong employee, a way to deflect and avoid responsibility.

(If I'm right about that, then the survey Liz Pulliam Weston cited would indicate that in 2006, 46 percent of American Human Resource managers were lazy, timid, indecisive, irresponsible and desperate to deflect blame. Hmmm. That sounds a little low.)

Hawaii and Washington state prohibit the use of credit scoring in employment decisions. Similar bans were proposed recently in California, Maryland and Connecticut, prompting aggressive lobbying from the credit agencies to protect their little racket.

It's telling that the heavy lifting for this lobbying has been done by Transunion, Equifax and Experian themselves. Their corporate clients haven't seen enough tangible benefit from this alleged service to justify their putting real any effort into lobbying for it.

I'd like to see those bills in California, Maryland and Connecticut pass, but I'm not advocating for such state laws here. That's too patchwork and piecemeal.

This is a national problem and it needs a national solution. I want to see a federal law and a nationwide ban on the practice.

Some 14.6 million Americans are out of work. Nearly 7 million of those are long-term unemployed — people who haven't been able to find a job in more than half a year.

Those millions of Americans, as a direct consequence of being out of work, have lower credit scores. Those millions of Americans, as a direct consequence of looking for work, have lower credit scores.[*] The credit agencies say that therefore the unemployed ought to remain unemployed.

The credit agencies are standing in the way of any solution to our largest and most urgent national crisis. They will have to be moved out of the way.

The use of credit checks in employment decisions should be banned. It is a form of discrimination against the poor — the codification and enforcement of class barriers. It is therefore a form of discrimination against those groups more likely to be poor and therefore a violation of the 14th Amendment. So it ought to be illegal already.

It's also cruel, costly, bad for business and bad for America. Outlaw it. Make the practice — both the use of such scores and the provision or marketing of such scores for that use — punishable by fines and imprisonment. Make the punishment large enough that employees practicing this form of discrimination know that it will involve serious repercussions — harm to their firm's "assets, reputation and security."

Rep. Steve Cohen, D-Tenn., has introduced federal legislation along these lines. H.R. 3149, the "Equal Employment for All Act," collected 54 cosponsors before losing steam in the House Committee on Financial Services. The bill, according to the Congressional Research Service summary:

Amends the Fair Credit Reporting Act to prohibit a current or prospective employer from using a consumer report or an investigative consumer report, or from causing one to be procured, for either employment purposes or for making an adverse action, if the report contains information that bears upon the consumer's creditworthiness, credit standing, or credit capacity.

Makes exceptions to such prohibition for employment: (1) which requires a national security or Federal Deposit Insurance Corporation (FDIC) clearance; (2) with a state or local government agency which otherwise requires use of a consumer report; or (3) in a supervisory, managerial, professional, or executive position at a financial institution.

We keep hearing that congressional incumbents are all in a precarious situation heading into the November elections. Political scientists and anybody with a long memory can explain that there's a one-word explanation for that: Unemployment.

If those incumbents want to be seen doing something about unemployment between now and the November elections, I'd recommend they dig out and dust off Rep. Cohen's bill and get H.R. 3149 onto the floor and passed into law as soon as possible.

– – – – – – – – – – – –

* Original post had the following above:

It's even worse than that, actually. One component we've identified

in the secretive alleged formulas used by the credit rating agencies is
that frequent credit checks will lower your credit score. So even if the
unemployed somehow manage not to fall behind on their bills,
they're still screwed.

Say you're unemployed and you decide to work your tail off to land a
new job, so you send out 40 résumés a week. Half of the companies might
decide to do a credit-check before getting back to you. This sets off
alarm-bells at the credit-rating agencies. Twenty credit-checks in one
week? There goes your credit score. And there goes your hope of landing a
new job.

This is what the use of credit scoring in employment
decisions means: Looking for a job disqualifies you from being hired.

I reassuringly assured that this is usually not true. Some kinds of frequent credit checks will lower your credit score, but some other kinds won't. Probably. And the credit-checks being misused by corporations for employment decisions are probably the kind that won't.

We can't know for sure, of course, because the calculations used by the various credit scoring agencies are based on secret, magic, invisible, proprietary formulas. For all we know, they're using a Ouija board, a deck of Sorry! cards and one of those ping-pong-ball machines from the state lottery. We don't have the right to know these formulas, or to question them, or to question their use to govern more and more of our lives.

Anyway, it's a relief to know that the act of applying for a job may not hurt your credit score, but not having a job unquestionably does. The misuse of these so-called scores in employment decisions functions primarily as a way of keeping the unemployed from gaining employment — the precise opposite of what needs to happen, what ought to happen and what everyone wants to happen. It's just a horrible idea horribly executed.

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