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No Credit Where Credit Reports Are Due

Matt Palmquist

Matt Palmquist is a freelance business journalist based in Oakland, Calif.

 

Bottom Line: A study shows that employees with poor credit are no more or less productive than their colleagues with better standing.

Many companies ask job applicants to provide a credit report during the hiring process. Human resources experts have become convinced that examining the financial history of potential employees can provide a valuable insight into their character, trustworthiness, and sense of fiscal accountability. But in recent years, the practice has come under increasing scrutiny, as critics argue that using credit status in the hiring process amounts to a subtle form of discrimination. Still, even though several states have enacted legal limits on employers’ use of credit checks, recent surveys show that about half of American businesses still use credit screening.

Perhaps they shouldn’t. According to a new study from the Massachusetts Institute of Technology, decades of data reveal that employees who develop bad credit are no more or less productive, on average, than their colleagues who have better credit standing.

Despite the pervasiveness of applicant credit checks, little has been proven about the presumed link between credit status and worker productivity. And there’s good reason for that. Credit reports — which are compiled by independent agencies using a person’s history of paying off credit cards, car loans, and mortgages — contain proprietary information and are difficult for researchers to access, let alone to connect with the corresponding employee’s professional performance. (It should also be noted that businesses typically look at credit reports rather than the simpler credit scores associated with consumer lending.)

Little has been proven about the presumed link between credit status and worker productivity.

To overcome this problem, the study’s author used proxy variables for credit quality, which he found in the U.S. Department of Labor’s National Longitudinal Survey of Youth. The survey is a nationally representative questionnaire filled out by thousands of people between the ages of 14 and 21, which for decades annually has gathered information on a range of relevant factors, including individuals’ net worth, wages, and credit card debt, and how often they were rejected on credit applications.

The researcher studied those survey participants with no obvious red flags on their initial credit status in his study sample. In other words, all the participants in the study started out on a roughly level playing field. Choosing this sample allowed the author to compare the productivity of two groups: employees who developed bad credit and those who retained or improved their credit standing.

If credit status is a defining, persistent characteristic of employees (and their future performance) and not merely a reflection of fluctuating economic circumstances, workers with lower credit status should exhibit poorer personal judgment and productivity growth in the workplace over time. Accordingly, the researcher tracked the same participants in the survey from 1999 through 2010, measuring their credit status and income as a way to gauge their personal financial responsibility against their long-term professional productivity.

The author controlled for several factors that could impact employees’ wage growth, including their level of education and demographic background. He also eliminated workers who had relatively innocuous reasons for dips in their credit status — student loans, a temporary period of unemployment, a divorce, or the development of a medical condition, for example — as opposed to those whose scores suffered owing to issues such as gambling debt or persistently missed payments.

The results showed no correlation between credit history and on-the-job productivity. If the two factors were correlated, over such a long time, one would expect the wages of people with bad credit to fall compared with those who had good credit. But in this study, individuals with poorer credit did not experience slower growth or more pronounced dips in wages, on average, than did coworkers with higher credit ratings. Even the calculation of credit card debt as a percentage of income, supposedly an indicator of personal responsibility, had negligible links to work productivity.

As the author notes, the use of credit reports as a screening tool predated the era of big data. Today, firms increasingly use a variety of personal information about prospective hires — derived from web analytics and social media activity — to compile an even more detailed picture of applicants’ qualities. Many critics hope that this broader tapestry of information can displace credit reports. But if credit status doesn’t convey meaningful insights into employees’ productivity, the author writes, similar concerns should arise about the validity of making hiring decisions based on big data.

Source:Is Credit Status a Good Signal of Productivity?” by Andrew Weaver (Massachusetts Institute of Technology), ILR Review, Aug. 2015, vol. 68, no. 4

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No Credit Where Credit Reports Are Due