Home > Finance, inequality, perverse incentives > Embedding Cruel Biases in Policy Choices: Credit Checks

Embedding Cruel Biases in Policy Choices: Credit Checks

Here’s a question that perhaps someone can answer for me:  why do businesses check the credit history of potential hires?   Seems obvious, right?   Except it’s not… when you stop to think about it, it’s a mean and idiotic practice with no reasonable justification.

Of course, credit history is nothing more or less than a measurement of financial stress.   It’s not a perfect measurement, to be sure… someone with (otherwise) good finances could have a poor credit score simply from not paying bills on time which could have been paid; or someone in financial stress can manage to maintain good credit ratings by borrowing from informal channels (family and friends) which don’t report to credit agencies.

Either way, the difference between your credit score and your financial stress is a matter of measurement error.   In the first example, the individual could borrow more–a rational bank would like to lend more, if given perfect information–but that particular individual probably needs the additional (unrelated) service of auto-billpay.   If the bank could swap auto-billpay for credit, it would surely do so.   In the second case the individual is in distress, and it is only the lack of communication with credit agencies which obscures this.

So, your credit score is a measure of your financial stress.  So what?

So why do businesses use credit checks to screen their hires?

If someone is unemployed, especially if that someone has been for quite a long time, that someone is almost certainly under financial stress.   Credit checks (I’m sure among other things) build in a bias in the system against the long-term unemployed.   That’s cruel.   Why do this?

Financial stress is unlikely to be correlated with future productivity.   Why would it be?   If you wanted to discriminate against the long-term unemployed, all you need do is look at their work history–that’s not it (not that that’d be a good reason, anyway).

I think the assumption is that credit history will be correlated with trustworthiness… but again, why?   The potential hire here wouldn’t be paying their employer, it’s the other way around.   So even if the hire is someone who skips paying their bills on time, now could that affect their employment.

I’m racking my brain to think up a rational reason for this cruelty and mostly coming up short.   The only explanation I have is one I try to stay away from–classism.  It is those people, the unwashed masses, they are the ones with poor credit scores.   We don’t want their kind here.

As I said, not very convincing.

As a social issue, the people who struggle to pay their bills and who are credit risks as a result are precisely the people we should be prioritizing in terms of getting them back to work.  Even if businesses have a rational reason for doing this–one which I haven’t thought of–as a society, we ought to be discouraging it.

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