With the nation's unemployment remaining stubbornly high, a number of states are taking a step to help job seekers: banning credit checks.
This month, California became the seventh state to prohibit companies from doing credit checks on many applicants, and similar bills are pending in another 19 states. On the federal level, a bill that calls for a similar ban is awaiting review by a House subcommittee. The moves could be "a game changer for people negatively affected by this economy," says Persis Yu, staff attorney at the National Consumer Law Center.
The trend also has ramifications for employers, who for years have been permitted to review the credit histories of prospective workers. The assumption, experts say, is that a bad credit report might help flag poor work habits and decision-making, and even general untrustworthiness.
Indeed, some 60% of employers report doing credit checks for some or all job candidates, according to the Society for Human Resource Management. Of those, more than 60% said they are unlikely to accept an applicant with an outstanding judgment currently filed against them, while nearly half would likely pass on one with accounts in debt collection.
Some research seems to back employers' fears: Nearly one third of employees with self-reported credit problems engaged in "counterproductive work behavior," such as theft or accepting bribes, compared to about 18% of employees without financial problems, according to a 2008 academic study.
But consumer advocates say credit problems are more widespread now because of the struggling economy. Over the past two years, for instance, roughly 4.8 million homeowners have received a foreclosure notice, according to RealtyTrac.com. A foreclosure stays on a consumer's credit report for seven years.
Given that backdrop, some argue that employers should hire based on skills and qualifications and not credit histories. Those in the job market "have plenty of obstacles right now and should not have to try to defend the fact that they missed payments on bills," says Diane Rosenbaum, an Oregon state senator whose bill banning certain credit checks became law in 2010.
Case in point: Karen Selling, a dietetic technician, says she and her husband, Christopher, a diesel mechanic, of Shelton, Conn., have been on dozens of interviews over the past two years, but neither has been hired because of their credit histories. When their son got sick a few years ago, the Sellings racked up medical debt and fell behind on their mortgage. "Nobody is giving us a chance," she says.
In many states with the new laws, employers can still check the reports of applicants for certain white-collar jobs, such as bankers and law-enforcement positions.
Under the Fair Credit Reporting Act, companies must get permission from applicants in writing to check their credit reports. For those with credit problems, it is better to explain what happened rather than deny permission, says John Ulzheimer, president of consumer education at SmartCredit.com, a credit-monitoring site.