Image: Unemployed man © Rubberball, Jupiterimages

Related topics: banking, financial privacy, credit reports, bad credit, Liz Weston

Credit background checks have become routine among employers, even as soaring unemployment and foreclosures have resulted in black marks on millions of people's credit histories.

Credit checks are required for federal jobs with security clearances, but six out of 10 private employers check the credit histories of at least some of their job applicants, according to a recent survey by the Society for Human Resource Management.

Companies do so primarily to prevent or reduce crime, such as theft and embezzlement, the survey indicated. The idea is that people who have debt problems are more likely to steal or commit other crimes.

Overused and abused

I've been reluctant to weigh in against employers using credit checks, assuming companies would use some common sense. The human-resources survey disabused me of that notion. Consider:

  • Thirteen percent of employers use credit checks for all their employees, including those who don't handle money, have any fiduciary or financial responsibilities, or even access to sensitive information. There's no evidence credit checks are effective in preventing crime even in financially sensitive positions, so how can we justify them for anyone else?
  • Twenty-five percent acknowledged that a bankruptcy on an applicant's credit report would most likely result in a decision not to make a job offer. Here's the problem: Using a bankruptcy as a decision not to hire (or to fire or to refuse a promotion) is illegal under federal law.
  • A majority (65%) allow applicants to explain credit-check results before the final hiring decision is made. But 22% allow applicants to explain only after a decision is made, and 13% don't allow any explanation. Even if employers are convinced that credit checks prevent crime, why wouldn't they want to know if an applicant was the victim of identity theft or ran up debt for a life-saving operation for their child?

Image: Liz Weston

Liz Weston

If companies aren't willing to use a little common sense on their own, maybe some needs to be imposed on them.

No evidence supports use

There's no hard evidence that links bad credit and bad morals.

"At this point we don't have any research to show any statistical correlation between what's in somebody's credit report and their job performance or their likelihood to commit fraud," Eric Rosenberg, the state government liaison for TransUnion credit bureau, conceded in testimony to Oregon legislators.

Rosenberg was actually arguing against a state bill that would limit employers' ability to use credit checks. TransUnion and other credit bureaus that provide the reports say they're an important tool for evaluating applicants.

The arguments didn't sway the Oregon Legislature, which recently passed a law prohibiting credit checks for hiring, firing, promoting or determining compensation for most workers. Exceptions were made for financial institutions, public-safety offices and other employment if credit history is important to a job and a background check is disclosed to the applicant or employee.

Washington state and Hawaii already have curbed widespread use of credit checks in making hiring decisions. Other states are considering similar laws, and U.S. Rep. Steve Cohen, D-Tenn., has sponsored a bill that would ban employment-related credit checks nationwide except when the job:

  • Required a national-security or Federal Deposit Insurance Corp. clearance.
  • Was with a state or local government agency that otherwise required the use of a consumer report.
  • Was in a supervisory, managerial, professional or executive position at a financial institution.

It appears that Congress won't act on Cohen's measure, though.

Some second thoughts

At least the federal Defense Finance and Accounting Service in Cleveland, which considered terminating dozens employees at least in part over bad credit, is now taking a second look at its decision. After the workers' situation was publicized and U.S. Rep Dennis Kucinich, D-Ohio, intervened, the agency agreed to review its actions and delay firing 39 people who had been expected to lose their jobs.

Defense Finance and Accounting Service spokesman Tom LaRock said the agency was just following guidelines set down by the Department of Defense in 2005. The workers' jobs were reclassified from "noncritical, nonsensitive" to "noncriticial, sensitive" because of workers' access to private, identifying information, such as Social Security and bank account numbers.

"Because of what we do -- paying people, paying all DOD bills -- because of that fiduciary responsibility, all DFAS positions were reclassified," LaRock said.

Click here to become a fan of MSN Money on Facebook

The guidelines require that workers be investigated not only for their credit but for other criteria including, according to a Defense Department fact sheet that LaRock supplied, "allegiance to the United States, foreign influence, foreign preference, sexual behavior, personal conduct, financial considerations, alcohol consumption, drug involvement, psychological conditions, criminal conduct, handling protected information, outside activities, and use of Information Technology (IT) systems."

Financial considerations alone rarely lead to firings, LaRock said. Typically, there is some other problem, such as "personal conduct" or false statements to investigators, he said.

If you agree that use of credit checks for employment purposes has gone too fa,r let your lawmakers know. You can find your congressional representative here and your senators here. And if you're job hunting, consider reviewing this fact sheet from the Privacy Rights Clearinghouse about what to expect.

Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.