1 Good Reason to Credit Check Applicants – And 5 Not To!
By Mark Swartz
Using credit checks to screen potential employees is a controversial practice. Unless the job involves handling money or access to large sums, it could be irrelevant.
Yet the use of these inquiries by employers keeps spreading. This has created a growing risk of turning away otherwise unblemished prospects.
When running a small business even one bad apple can rot the works. But is relying on a candidate’s credit report more harmful than helpful?
One Excellent Reason to Run A Personal Credit Check
When a potential worker will be dealing directly with money – the company’s or that of other people – it makes sense to minimize risk. Intuitively an applicant in financial trouble may be more tempted to appropriate some accessible funds for themselves.
Today it isn’t just employees who handle cash to vet. Computer operators with access to a company’s bank accounts or discretionary funds could steal as well. Then again so could any staff with financial signing authority, so they too might be included. That still won’t prevent getting stung by a dishonest job seeker.
Many Reasons Not To Bother
It doesn’t cost much to order a credit history on a candidate. In Canada there are two main reporting agencies: Equifax and TransUnion. So long as you have permission in writing the details are readily available.
Except what good will they actually do? If the goal is to reveal a person’s character, or predict future behaviour, consider the following. “Credit reports were not designed as an employment screening tool,” public policy group Demos stated in a widely quoted report. “Instead, they were developed as a means for lenders to evaluate whether a would-be borrower would be a good credit risk.”
This leads to five reasons not to incorporate them into hiring decisions.
1. Lack of Predictive Validity
The use of personal monetary data in non-finance employment is questionable at best. Moreover studies that try to correlate fiscal history with increased workplace criminality are decidedly mixed.
2. Hiring Managers Are Not Trained In Data Parsing
Hand a recruiter the credit report of an applicant. Ask for a detailed analysis of what the history indicates. The likely response is an individual judgement based on available numbers alone.
What’s missing is professional training in reading these kinds of reports (never mind the applicant’s explanation for irregularities). Does a high debt to income ratio suggest poor fiscal management, or merely a tactic of leveraging? Do those minimum payments on credit cards prove financial difficulties, or a strategy to maximize one’s credit score?
3. The Information May Be Wrong or Incomplete
Credit agencies in Canada manage more than 20 million records. Sometimes they contain errors. They could also fail to update info in a timely way.
Making matters worse, the average person doesn’t know how to get their credit report corrected. That’s if they are even aware it’s something they should do regularly.
4. The Data May Be Misleading
A shortcut for thoroughly scrutinizing an entire report is to use an applicant’s credit score as a guide. The assumption is that a fiscally prudent person will always have a higher rating.
Except it isn’t always true. Closing bank accounts or credit cards can lower the score. Not making use of your loans or charge cards can have a similar effect. In other words, being cautious about spending too much could actually make a person seem more of a risk.
5. It’s An Invasion Of Privacy
Canadian law currently allows employers to ask an applicant’s permission to run a credit check. However just because you can doesn’t mean you should.
Some of the better candidates may balk at being probed this way, especially if the job gives them little or no access to money. Why treat people like possible criminals unless it’s necessary to do so?
If you’ve already conducted a background and reference check, plus a social media snoop, there is plenty of data to weigh. Prying needlessly creates a condition for mutual distrust. At some point the facts at hand, along with your interview intuition, should be enough to decide properly.