Many employers use credit checks when evaluating job applicants, either due to a legal requirement or out of caution. In today’s economic environment of ample debt, Michael Klazema, chief marketing technologist at VODW examines whether these evaluations offer any useful information to hiring managers.
Undergoing a criminal background check during the hiring process is not uncommon for applicants â€“ but when they learn that employers may consider their credit, they have justified cause for concern.
While not every business looks at credit during hiring, credit checks are universal among financial institutions and for positions involving the handling of market or consumer funds. The traditional reasoning is simple to understand: employers use credit reports to spot finance-related red flags so that the business can prevent fraud, safeguard the assets of others, and establish an individual’s fiscal trustworthiness.
Is credit check technology a useful component of modern HR technology? Changes in consumer habits and rising economic pressures indicate that it may be time for employers to re-evaluate their traditional assumptions about credit to use credit checks responsibly.
Does a Credit Check Tell the Whole Story?
Businesses using credit check technology must contend with complex rules and regulations to avoid possible discrimination. The information that they receive may not always offer clear-cut conclusions. In the past, high levels of personal debt were less frequent. Household debt levels have steadily risen over the past decades, including an explosion in debt from 2000 onward. The 2008 financial crisisOpens a new window deepened the hole of debt for many Americans.
Consider that the average credit card debt held by individuals today stands around $8,400. Credit card usage is only the tip of the iceberg. According to a study reported on by CNBCOpens a new window , 32% of American workers surveyed reported carrying medical debt, and 54% of those individuals had to default on those obligations at least once. More than a quarter of respondents said they had total debt of over $10,000.
Applicants in the workforce today also shoulder the burden of student loan debt. With trillions of dollars tied up in educational loans nationwide, the average student graduates with a debt load of $30,000 â€“ some will receive their diplomas with more than $100,000 in debt. Add in a car loan and possibly a mortgage payment, and it’s easy to see how digital credit reports tell a dire story.
An employer pulling a credit report today is more likely to see a litany of possible â€œred flagsâ€ such as debts. As a result, fully automating the process of analyzing an applicant’s credit report for suitability and risk with a technological solution could leave a business without valuable context.
A computer assigning a â€œgradeâ€ to a credit report can’t factor in extenuating circumstances that it doesn’t know. A weak credit report should not eliminate a conversation with an applicant that could reveal pertinent additional information. A talented and responsible applicant may perform exceptionally well in an interview and offer highly useful skills even though his or her credit report exhibits many of the most common debt problems found nationwide.
If looking at the debt presented on a credit report alone is not sufficient to make a decision, what about payment history? Credit reports also include that information, and employers may attempt to use payment history to evaluate an applicant’s ability to handle money responsibly. With such high debt loads across so many financial categories, many people have developed rocky payment histories, too. NerdWallet found that more than a quarter of Americans made at least one late payment in 2019, and such delinquencies are on the rise.
The truth about new debt is that almost every applicant has some. Amid public debt, employers may have trouble differentiating between mitigating genuine risks and eliminating valuable talent based on credit factors alone.
Credit checks have not lost their value in the hiring process â€“ they remain a vital tool, especially for identifying applicants who may pose a genuine financial risk. The landscape of modern debt means that employers may benefit when they see credit reports not as an applicant’s whole story but rather as the first page.
Credit Checks and Profiling Potential Offenders
Preventing white-collar financial crimes such as embezzlement is one of the top reasons that employers give for using pre-employment credit checks. According to businesses, an individual in a financial hole will be more likely to look for the opportunity to skim company or client funds or data. Blemishes on someone’s financial record are seen as indicators of a higher risk for mismanagement of funds â€“ yet a look at the data suggests that these common assumptions aren’t always rooted in reality.
According to the 2018 Hiscox Study of EmbezzlementOpens a new window , 79% of embezzlement cases involved more than one person, and 85% of cases occurred at the managerial level or higher â€“ one-fifth of those cases involved C-suite employees. Most embezzlers engage in long-running schemes averaging at least two years rather than stealing only once. Motives such as a desire to punish an employer for perceived slights and opportunities created by lax security were often contributing factors in the crime.
Few of these statistics describe the average entry-level employee facing a credit check. While personal financial pressures can represent a risk in the workplace, with an economy in flux and monthly payments mounting on every side, hiring managers are more likely than ever to encounter at least a few issues on any pre-employment credit check.
Credit Check Technology Is Only One Tool
If credit history cannot tell the whole story, how can a business protect itself from white-collar crime? As with any element of risk management, the right technology and good governance make a significant difference in fostering better outcomes.
Credit checks are one of the tools in that arsenal. Procedural changes can minimize opportunities for theft, and deploying sound post-hiring technological solutions in HR can identify issues before they become serious as well. Fraud detection software, for example, could aid in spotting financial irregularities across a company’s transactions.
The right technology with procedures for investigating and stopping white-collar crime may do more to protect a business from long-term risks than relying on a single credit report screening. Though such checks are still required by law for some positions and remain valuable resources for others, it may be time for employers to rethink how to make the best use of the information that they provide.
Credit histories are an essential first line of defense, but they can’t tell the whole story.