Meeting of October 20, 2010 - Employer Use of Credit History as a Screening Tool
I would like to thank the Commission for providing the opportunity to briefly discuss the validity of credit checks in the employee selection process. Let me begin by stating that I have no vested interest in whether organizations use credit checks; my purpose in testifying today is to provide an objective review on what we currently know about the validity of credit checks. My plan is to first discuss the potential reasons for using credit checks, then discuss potential adverse impact, and conclude with a summary of the small amount of research investigating the validity of credit checks in predicting employee performance.
On the basis of surveys conducted by the Society for Human Resource Management (SHRM, 2010), approximately 60% of organizations use credit checks when selecting employees for some jobs. Given this high degree of use, it is fair to conclude that many employers believe that credit checks provide useful information for certain jobs. From my discussions with employers, there are five common reasons why organizations use credit checks for employment purposes:
Given this thinking, the question becomes: Are any of these reasons valid? Although there is considerable research that supports the use of credit scores in making consumer decisions, there is little research exploring the implications of using credit checks in employment decisions.
So, what do we know?
When looking at gender and race differences in credit scores, two large studies by the Federal Reserve System in 2003 and Freddie Mac in 2000 concluded that Asians and Whites have higher credit scores than do Hispanics and African Americans. From these findings we might conclude that adverse impact is likely to occur if we use credit checks for employment purposes. However, it is important to note that employment credit histories do not include a credit score and thus it may not be accurate to generalize findings from credit scores. Let me also note that we have clients that use credit checks that do not find adverse impact; a finding that can be at least partially explained by the notion that people with poor credit histories probably do not apply for positions in which they know a credit check will be conducted.
Is this potential adverse impact justified by business necessity? I could find only ten studies (5 related to credit history, 5 to self-reported financial problems) that correlated credit history/financial problems with counterproductive work behaviors (e.g., absenteeism, discipline problems). When these studies are combined using meta-analysis, the average uncorrected validity coefficient is .15; a level comparable to that found with personality inventories (Hurtz & Donovan, 2000). As shown in Table 1, financial problems seem to be correlated most highly with absenteeism (r = .21) and least highly with performance ratings (r = .07).
Table 1 Meta-Analysis Results
|Criterion||K||N||r||90% Confidence Interval||SE%|
|K = number of studies, N = total sample size, r = sample-size weighted uncorrected average correlation, SE% = percent of variability that would have been expected by sampling error|
Where does this leave us? There is so little research on the topic that any conclusions would be premature. This lack of research is especially important to note because there have only been five studies that investigated actual credit history rather than self-reported levels of financial stress. Given the potential levels of racial/ethnic adverse impact as well as the impact on individuals whose poor credit history is due to reasons often out of their control (e.g., divorce, illness), it would seem prudent for organizations using an applicant’s credit history to do so in the context of a thorough background check that would indicate whether a poor credit history is an anomaly or is indicative of a problematic lifestyle that might impact behavior at work.
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* Study was used in the meta-analysis