Friday, December 25, 2009

The credit event horizon

Lately many employers have started requiring credit checks before they hire you. This has obvious and worrisome consequences:
Digging out of debt keeps getting harder for the unemployed as more companies use detailed credit checks to screen job prospects.

Out of work since December, Juan Ochoa was delighted when a staffing firm recently responded to his posting on with an opening for a data entry clerk. Before he could do much more, though, the firm checked his credit history.

The interest vanished. There were too many collections claims against him, the firm said.

“I never knew that nowadays they were going to start pulling credit checks on you even before you go for an interview,” said Mr. Ochoa, 46, who lost his job in December tracking inventory at a mining company in Santa Fe Springs, Calif. “Why would they need to pull a credit report? They’d need something like that if you were applying at a bank.”

Once reserved for government jobs or payroll positions that could involve significant sums of money, credit checks are now fast, cheap and used for all manner of work. Employers, often winnowing a big pool of job applicants in days of nearly 10 percent unemployment, view the credit check as a valuable tool for assessing someone’s judgment.

But job counselors worry that the practice of shunning those with poor credit may be unfair and trap the unemployed — who may be battling foreclosure, living off credit cards and confronting personal bankruptcy — in a financial death spiral: the worse their debts, the harder it is to get a job to pay them off.

“How do you get out from under it?” asked Matthew W. Finkin, a law professor at the University of Illinois, who fears that the unemployed and debt-ridden could form a luckless class. “You can’t re-establish your credit if you can’t get a job, and you can’t get a job if you’ve got bad credit.”

From the New York Times. Now I can kind of understand the logic of the employers from a risk management point of view; besides the vague notion that it's a sign of your reliability, there's the idea that people who are in financial difficulties might have more of an incentive to steal or to take bribes. The downside, of course, is that if this becomes widespread it has the potential to create legions of people who can no longer get good jobs, whose talents are wasted and who end up on the dole or working as day labourers. For many such people, there will be no way out; once you've messed up your credit you'll have passed the point of no return. Unfortunately, this downside is what economists call an externality; it's not the company but society at large that pays the cost. Fortunately, some jurisdictions are trying to restrict this practice, but the support for this isn't universal. From the same article:

Last month, lawmakers in Hawaii approved a measure that generally allows an employer to review a credit history only after making an offer and requires the credit check to be “directly related” to job qualifications.

In California, Gov. Arnold Schwarzenegger vetoed a similar law. (New York law requires a background check’s findings to be related to the job, but it addresses criminal records and does not mention credit checks.)

Now I wonder what the Terminator was thinking? Perhaps he doesn't want to set a precedent in terms of telling companies how to make hiring decisions, or perhaps he thinks it would be good to establish a permanent pool of low wage workers to cut labour costs. Whatever he's thinking, someone needs to give his head a shake.

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