Do bad employees have bad credit?

Twice, J.M. Harrison was on the verge of getting a good job at a major company. All that was left was a routine credit check. He told them what they'd find -- credit damaged by periods of unemployment. He didn't get either job.

Harrison, who now works as a college history teacher, might have a different experience if he applied for those jobs today. Oregon, where he lives, has become the third state to bar employers from considering credit reports in hiring, with some exceptions for jobs where a credit history is considered relevant, such as in law enforcement and at banks and credit unions.

At least 16 states have considered such laws, as has the federal government, but Washington and Hawaii are the only other states to limit employer credit checks. California Gov. Arnold Schwarzenegger vetoed a bill passed by California's legislature last year.

Those who oppose employer credit checks say it unfairly penalizes people who have run into financial trouble through no fault of their own, perhaps because of illness or unemployment. Getting a mortgage modification, even if you don't miss any payments, can damage your credit. Credit reports also can contain errors.

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Maryland legislator Kirill Reznik, who drafted a bill for his state, noted the vicious cycle that can be created when people who lose their jobs run into financial problems:

People lose their jobs. That naturally precipitates them getting behind on bills, their credit scores go down, they are trying to find a job to pay off the bills, and employers won't hire them because of their credit score.

The issue has become especially important in the current economic times, where the national employment rate is hovering near 10% and the rate in some states is as high as 15%. At the same time, more than 25% of Americans have credit scores of 599 or below, generally considered too low to get a mortgage.

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Advocates of limiting credit checks by employers argue that a credit record doesn't provide any indication of what kind of employee someone will be, or even whether an employee will be honest. Lenders are discovering that credit scores may not even be an indication of who will default on a mortgage.

As Matthew Lesser, a Connecticut legislator who introduced a bill to limit use of credit reports in pre-employment screening, told The New York Times:

Bernie Madoff had a pretty good credit score. … And yet there is this consistent message that if you have a bad credit score, there is something wrong with you.

The major advocates of using credit reports for employment screening have been the reporting agencies themselves, as well as some business groups.

Norm Magnuson of the Consumer Data Industry Association, a credit bureau trade group, told Detroit's MetroTimes that employers are struggling, too. Credit checks help them identify the most qualified candidates for jobs.

Now is not the time to start placing a lot of control on employers. It's a difficult time for them too, and they have a stake in making sure the people they hire are honest.

Several employers who commented on a post about the new Oregon law at Bargaineering said they had found credit checks a valuable tool in employee screening, and most of the commenters didn't like the new Oregon law. A reader named Grant wrote:

As a manager, I can tell you that there have been several situations where an employee seemed great on paper and in interviews, but was a dud. The common thread? They all had awful credit, and I couldn't figure that out before they were employed. Is it a litmus test? Of course not, but it should be allowed to be one part of a multidimensional appraisal of an individual's abilities, commitments and ability to follow through.

But a reader named Andrew disagreed, saying:

Is a person who cannot pay for their own or family's cancer treatment irresponsible? How about someone who uses their credit limit up to the max for groceries when they cannot afford to put food on the table. This shows rational good decision making. Wouldn't that mean they are good employees?

Guess which group of people walked away from mortgages when they could afford to pay: 750+ [credit score] crowd. Why? Because people with good credit know how to use it, that is all. It is very imperfect information. Much like looking at someone's teeth to see if they are good for a job. It relates to other matters but most employers end up misusing it because they misunderstand it.

Do you think checking someone's credit is a valid tool for employment screening? Or do you think more states should follow Oregon's lead and limit the use of credit reports in hiring decisions?

More from MSN Money:

• How bad credit can cost you a job
• Credit checks: A civil rights issue
• Weird stuff that hurts your credit
• Could you be fired for bad credit?
• How 5 money blunders ding your credit
• Bad credit? Say goodbye to your job