Most people have figured out that a bad credit report makes it hard to get a loan. What might come as a wider surprise is that, nowadays, bad credit can also keep you from getting a job.
Credit checks have become a routine part of the hiring process. Nearly half of all companies run them on potential employees, according to the Society for Human Resources Management. One in four Americans say they have been told that they missed out on a job because of their credit history (this from polling cited in a recent report by Demos).
And yet, as Richard Tonowski, chief psychologist for the Equal Employment Opportunity Commission, testified a few years ago, there is "very little evidence that credit history is indicative of who can do the job better."
Indeed, credit problems are more a symptom of bad luck than of bad character nowadays. Many people were propelled into unmanageable debt by the housing bubble , the subprime mortgage boom or the surging unemployment of the Great Recession. "Millions of people stumbled financially when shrinking home prices left them unable to refinance or to sell a home," Sen. Elizabeth Warren, D-Mass., pointed out in a recent floor speech about a bill she has introduced to prohibit the use of credit checks in employment decisions.
Warren was talking about a category of misfortune, moreover, that has fallen disproportionately on African-Americans and Latinos, who were unusually likely to be steered into needlessly expensive and tricky loans during the bubble years.
Young adults are also more prone to debt trouble; that's partly because many people made student-loan decisions in good times, only to emerge into the labor force in not-so-good times. Among older Americans, the road to unmanageable debt began in many cases with the one-two punch of job loss followed by health insurance loss. Medical bills account for about half of all the debts reported by collection agencies to the credit reporting companies, or credit "bureaus," as they are known.
In short, when employers make hiring decisions based on credit checks, it's an institutionalized form of kicking people who are already down. It's also a practice that compounds the enormous damage already inflicted on millions of Americans by a reckless financial industry.
So the case for Warren's "Equal Employment for All" bill would be a strong one, even if it rested entirely on the injustice of assuming a correlation between work ability and the ability to pay one's debts. But credit reports are also a highly unreliable guide to credit-worthiness, because the credit bureaus get the facts wrong way too often.
While there are many smaller, "specialized" credit bureaus, we're mainly talking about the so-called Big Three – Equifax, Experian and TransUnion. Together, they collect an estimated 4 billion pieces of information a month on the financial activities of more than 200 million Americans; then they turn around and sell their data to creditors, debt collectors, insurers and landlords, as well as employers.
Despite their critical importance to the financial lives of Americans, credit reports contain unacceptable numbers of errors, which can be exhaustingly hard to correct. According to a 2013 study by the Federal Trade Commission, the reports of more than 20 percent of U.S. consumers include confirmed mistakes, while 5 percent of reports (covering 10 million people) have errors serious enough to make future credit costlier or more elusive.
Why do the credit bureaus appear seem be so untroubled by inaccuracy? Because their principal clients are companies, including lenders and debt collectors, that care more about having every last ounce of adverse information than about whether a few untruths slip in. This is an industry, in other words, that competes on its ability to dig up dirt, not to get the full, fair story
How biased in favor of creditors and debt collectors over consumers are the Big 3 credit bureaus? One indicator is the common practice of matching information from a lender into a consumer's credit report based only on seven out of nine digits of a Social Security number, as long as the names are similar. This can result in identity mixups in which information on two different people gets mushed together into a credit report that damages the person whose credit record is actually just fine.
Consider, also, the obstacle course facing those who discover a mistake and set out to correct it. An Oregon woman, Julie Miller, made nine futile attempts over a span of two years to get Equifax to fix her credit report, which had become mixed up with another woman with the same name. A jury awarded Ms. Miller $18.6 million in actual and punitive damages. (The award is on appeal.)
Under existing federal law, the credit bureaus must conduct a "reasonable" investigation whenever a consumer complains about an error. In practice, what they commonly do is forward an inquiry to the credit "furnishers" from whom the disputed information came, and then parrot back to the consumer whatever the furnishers say in their own defense. They spend woefully little on this process. By the mid-2000s, one credit bureau, which outsources its investigations to foreign affiliates and vendors, had reportedly whittled the cost down to 57 cents per letter of complaint, even with letters that raised multiple issues.
Nine senators have signed on as cosponsors of Warren's "Equal Employment for All Act." That legislation faces huge obstacles in Congress, however. At least for now, there are far better prospects for a response at the state level. Ten states have already passed laws restricting the use of credit checks in hiring decisions. One recent state to do so, California, has prohibited the practice in connection with most jobs, carving out exceptions for management and law enforcement, as well as positions involving the handling of money.
Help of a different kind could come from the Consumer Financial Protection Bureau. While the CFPB may not have the power to tell employers what to do, it has authority over the credit bureaus themselves; it can direct them to fix their systems and treat people more fairly. But it will have a much easier time if it hears from consumers.
The bureau has been collecting complaints about credit reporting since October 2012. CFPB complaint data and the analysis of that data by the U.S. Public Interest Research Group's Education Fund provide a revealing look at how consumers have been hurt by the slipshod practices of the credit bureaus. Over 10,000 complaints have been submitted to date; as even more people tell their stories and the evidence builds, the CFPB, the states and, we can hope, eventually Congress too, will recognize a duty to act.
Jim Lardner is the communications director at Americans for Financial Reform. Chi Chi Wu is a staff attorney at National Consumer Law Center specializing in credit reporting and other consumer credit issues.