Consumer Federation of California

Credit checks during the hiring process can exacerbate already tenuous financial situations.

Credit screenings are a common part of the hiring process. Nearly one in three employers will perform one on a job candidate during the hiring process, according to a recent study from job search site CareerBuilder. From the employers’ point of view, it is preferable to hire someone with good credit because that is an indicator of their productivity. But a new working paper from researchers at the University of Wisconsin, Madison, and the University of Texas at Austin demonstrates how this standard can hurt low-income Americans.

The use of pre-employment credit checks leads to a “poverty trap” in which an unemployed worker with poor credit has more difficulty finding a job. That causes them to go longer without a steady stream of income, which in turn makes it more difficult to pay off their debts. Consequently, their credit gets even worse. Overall, this poverty trap is associated with a 2.3% wage loss per month over a 10-year span, according to the working paper, which was distributed Monday by the National Bureau of Economic Research.

This echoes previous research from progressive policy group DEMOS, which found that 10% of people living in low-to-medium-income households were denied a job because of bad credit. To address this problem of profiling the most financially vulnerable job seekers, Sen. Elizabeth Warren of Massachusetts reintroduced a bill last year in the wake of the Equifax data breach that would prohibit the practice at the federal level.

In fact, lawmakers at the state level have already banned pre-employment credit checks. Multiple states — including California, Connecticut, Illinois and Washington — have set limits on the use of credit information when hiring. Lawmakers in the District of Columbia and New York City have also enacted bans in recent years.

Read the rest at MarketWatch &#8594

Tags: 2011 legislation, ab 22, credit checks, employers, workers