The first couple of times Alfred Carpenter was turned down for a job, he didn’t know what to think.
He been laid off early in the recession and then had the bad fortune of tearing tendons in his knee just when he didn’t have health insurance. The job market was terrible, and he had been out of work for more than a year. But the managers at the first two shoe stores to which he applied in the summer of 2010 seemed to be taken by his résumé. The manager at one shop was already discussing salary. The other, he said, invited him to fill out the paperwork normally done on the first day on a job.
“Who does that if they’re not planning on hiring you?” Carpenter asked.
Yet neither job materialized. One manager, he said, “basically hung up on me.”
A friend at Bergdorf Goodman, the high-end clothier, secured him an interview for an opening in the shoe department. But when Carpenter confided to his friend that his finances were a mess, “he tells me, ‘Oh, you’ve got bad credit? They’ll never hire you.’”
Sure enough, a week or two later, Carpenter said, he received a notice from Bergdorf informing him that while running a credit check, the store found information that played a role in its hiring decision. It was a so-called adverse action letter that by law a business conducting a credit report is supposed to send to an applicant.
Carpenter kept applying for jobs and kept checking off the box granting his would-be employer permission to look into his past. And he kept being turned down. There was the recession and there might have been dozens of applicants for each of these jobs. But while Bergdorf was the only company to follow up a job rejection with an adverse action letter, Carpenter became convinced that his credit report was a curse.
“No one lets me explain, ‘Hey, I had this freak injury when I didn’t have health insurance,’” he said. “It’s black and white: ‘You have these bad marks on your record, you don’t get hired.’”
Down to his last $200, he applied for and was granted food stamps and federal housing assistance.
“There’s no reason,” he said, “a strong, able guy like me should have to go on welfare.”
People tend to think of banks and other lenders as the main users of credit reports. But over the past several decades, credit reporting bureaus have been selling their services to a much wider range of buyers.
Fighting the Catch-22
“Credit reports are really seeping into the soil,” said Sarah Ludwig, co-director of the Neighborhood Economic Development Advocacy Project, a New York-based nonprofit. “It’s taken an outsized role in employment, housing and insurance.”
For those seeking a job, it can lead to what Chi Chi Wu, a staff lawyer at the National Consumer Law Center in Boston, calls “a bizarre, Kafkaesque experience.”
“Someone loses their job,” Wu said, “so they can’t pay their bills — and now they can’t get a job because they couldn’t pay their bills because they lost a job? It’s this Catch-22 that makes no sense.”
It can also be a kind of backdoor job discrimination, Wu contends, given the numerous studies that demonstrate that those black, Latino or simply poor are more likely to have lower credit scores than those who are white and have means.
Experian, one of the big three credit reporting bureaus, states in its marketing materials, “Credit information provides insight into an applicant’s integrity and responsibility toward his or her financial obligations.”
But to Wu and others, a credit report says more about a person’s economic circumstances than his or her moral character.
“Some people can go to daddy and say, ‘I can’t pay my bills, will you bail me out?’” Wu said. “And others can’t.”
Nearly half — 47 percent — of employers use credit checks when making a hiring decision, according to a 2012 survey by the Society for Human Resource Management. Most businesses use credit checks only to screen for certain positions, but 1 in 8, the survey found, does a credit check before every hire.
“We’ve heard from dozens of people over the past several years who say they’re being denied jobs specifically because of a credit check,” Ludwig said.
The people contacting her group, she said, are “mostly lower-wage workers,” especially those applying to big retail chains.
“Prohibiting the use of credit checks in employment is now our No. 1 campaign,” Ludwig said. “Because it’s discriminatory. And because the last thing we need in a recession is another barrier to employment.”
Lawmakers in some jurisdictions have proved sympathetic to those arguments. Nine states have adopted legislation that curbs the use of credit reports to judge prospective hires — seven of them since the start of 2010. Rep. Steve Cohen, D-Tenn., has sponsored federal legislation that would restrict their use. The New York Legislature and the New York City Council are considering strict new laws that would greatly limit an employer’s ability to do credit screening.
Advocates and lawmakers are already seeing the impact of their efforts. The Society for Human Resource Management started polling members about use of credit reports as a pre-employment tool in 2004. Over the years, the numbers were consistent: Six in 10 businesses indicated that they used them. But in its most recent survey in 2012, that number fell to just below 5 in 10. That decline no doubt is the result, in part, of new state prohibitions and the attention the issue has received in the past few years, said Kate Kennedy, a spokeswoman for the society. But she also notes that her association has been educating its members in the importance of looking at “how relevant a credit check is for a particular position.”
That is bad news for the big three credit reporting bureaus: Experian, TransUnion and Equifax. But how bad is anyone’s guess. They do not reveal what portion of overall revenue is derived from employment-related credit checks. Even if they did, the number would only offer a partial picture, said Terry Clemans, executive director of the National Consumer Reporting Association, an industry trade group based in Roselle, Ill.
“There are several hundred companies out there that specialize in employment screenings,” he said.
Some jobs require a credit check by law. Depending on the state, that includes positions as teachers, police officers, firefighters and day-care operators, said Kennedy at the human resource society.
Most of the state laws curbing the use of credit reports as an employment screen carve out exceptions for people applying for supervisory positions or executive positions inside a financial institution. Cohen’s House bill creates exemptions for those seeking a national security clearance.
But what about everyone else?
Companies that use credit reports as an employment screen seem generally reluctant to talk about how or why they use them. Bergdorf Goodman declined to comment, as did several other retailers who rejected Carpenter for a position. A representative of J. Crew said that the company stopped reviewing credit reports in 2012.
“Employers are looking for a sense of responsibility,” said Richard Mellor, a vice president at the National Retail Federation. “They want to see that an individual pays their bills on time and takes responsibility for what they buy.”
Consumer advocates say that there is little evidence for the industry’s claims of a connection between a credit report and an employee’s trustworthiness. One study published in 2008 in the International Journal of Selection and Assessment suggested a correlation between a person’s financial history and workplace theft. But a 2011 study in the Journal of Applied Psychology found no link between a person’s credit score and what it called “deviant” behavior like workplace theft. (It did, however, find a correlation between a low credit score and an agreeable personality.)
Critics also have the testimony of the TransUnion official who told the Oregon Legislature in 2010, “We don’t have any research to show any statistical correlation between what’s in somebody’s credit report and their job performance or their likelihood to commit fraud.”
“As a researcher, I’d like to think that if about half of all employers are doing this, they must have some real evidence that it’s valuable,” said Traub of Demos. “But in this case that evidence is really lacking.”
Carpenter finally landed a job at the end of 2011. He caught a break after he confided his troubles to a friend in the shoe business. The friend, too, had credit problems but had found work at a Manhattan shoe store. Carpenter secured a job there and, last fall, he moved to another store where the pay was better.
“I’m happy,” he said, but he also feels shell-shocked.
“I have this accident and mess up my credit,” Carpenter said, “and now I’m the guy people don’t see as trustworthy.”