The spread of the credit check as civil rights issue

Lisa Bailey worked for five months at Harvard University as a temp entering donations into a database. When the university made the job a salaried position, Ms. Bailey, who is black, saw a chance to lift herself out of dead-end jobs.

Bailey's superiors encouraged her to apply, she says, but turned her down after discovering her bad credit history.

Bailey, with her lawyer, has lodged a complaint against Harvard charging racial discrimination. The reason: Studies show that minorities are more likely to have bad credit, but credit problems have not been shown to negatively affect job performance.

Some privacy and minority advocates are now seeing credit as a civil rights issue as minorities start to fight employers and insurers who base decisions on credit histories. Their effort could slow the near doubling in credit checks by employers in the past decade, which impacts millions of Americans who are struggling with debt.

"It's definitely a civil rights issue because of the growing use of credit reports and credit scores for hiring, renting an apartment, insurance, and the fact that people of color have not been integrated into the credit scoring system as much as traditional, white, middle-class America," says Evan Hendricks, author of "Credit Scores & Credit Reports: How the System Really Works, What You Can Do."

In a 2004 study involving 2 million people, the Texas Department of Insurance found that blacks have an average credit score roughly 10 percent to 35 percent worse than whites; Hispanics have scores 5 percent to 25 percent worse than whites.

Credit checks are a growing factor in hiring, with 35 percent of employers checking applicants' credit in 2003, up from 19 percent in 1996, according to the Society of Human Resource Management (SHRM). Typically credit reports are done if a person is going to deal with money, says John Dooney, a manager of strategic research at SHRM.

Employers should look at credit only for jobs where the information is relevant, says Lester Rosen, president of Employment Screening Resources, a national background screening firm in California. He cites a few examples:

• For jobs handling money, people may have the motive to steal if their debts surpass their salary.

• For jobs requiring travel, bad credit could bar applicants from renting cars or buying tickets.

• For jobs managing money, the report can offer some clues on how applicants manage their own.

Particularly in that last scenario, he cautions employers to be circumspect since blemishes might be errors or beyond the person's control, such as sudden medical expenses. Legally, employers must receive written permission from applicants to do a credit check, and must give those denied because of credit a chance to respond.

Mr. Rosen defends the careful consideration of credit in the hiring process. "If Harvard hired a person and did not use a credit report and the person embezzled, what would the headline be?" he asks.

So far, there's a lack of data supporting a relationship between bad credit and theft by employees. In perhaps the only study published on the subject, Jerry Palmer and Laura Koppes at Eastern Kentucky University in Richmond in 2003 found no correlation between employee credit reports and negative performance or termination for dishonesty.

Antidiscrimination laws bar a hiring practice that disadvantage minorities – even inadvertently – unless a company can prove it's related to measuring a person's capability to do a job. Bailey's lawyer, Piper Hoffman, has taken on several cases in which companies used credit as a factor in the hiring process. In one 2004 case, she says, an employee's lawsuit against Johnson & Johnson resulted in a settlement that changed the way the company used credit in its hiring practices.

"In the larger picture, we're hoping to get Harvard and other employers to stop using credit as a criterion in hiring," Ms. Hoffman says.

Bailey lodged her complaint in November with the Equal Employment Opportunity Commission (EEOC), which reviews all such cases before any lawsuits can be filed. Agency officials say there's anecdotal evidence these cases are on the rise.

"Employers seem to be assuming that somebody with a poor credit history is more likely to steal, and I don't think there's any kind of evidence that supports that," says Dianna Johnston, assistant legal counsel with the EEOC. "To the extent that the employer has done an in-depth look and found other indices of dishonesty, they would be on more solid ground."

In a statement, Harvard noted that a "relatively small percentage" of jobs at the university require a credit check.

"The university conducts credit history reviews for employment purposes as required by credit card issuers, as well as to fulfill our fiduciary and data privacy responsibilities," says the statement. "Those responsibilities include protecting the private credit card data of our students, faculty, parents, and alumni."

Bailey says that if Harvard was concerned she might steal, the university should have looked at criminal records instead. "I was a cashier for many years and I've never been rich and I've never stolen money," she says.

She ran into credit-card debt she couldn't pay back when she spent some time unemployed. Harvard, she says, offered to reconsider if she could clear up her report in one week.

"The only way I can get it cleaned up in seven days is if I have money, so there was no way," says Bailey.

Ernest Haffner, an attorney adviser with the EEOC, notes that employers who screen for credit are setting up a Catch-22 for poor people: They need jobs to get good credit, but employers won't hire them because they don't have it.

The racial component to credit histories has been challenged in the insurance arena, too. The Texas Department of Insurance study found a relationship between credit scores and claims filed.

However, a class-action lawsuit against Allstate has just been settled, which resulted in the company changing the way they evaluate credit reports, says Wendy Harrison, a Phoenix-based lawyer who brought the case.

"What we've argued in our [insurance] cases is that you can adjust for [racial bias]," Ms. Harrison says, who has also handled cases of credit screening by employers.

Employers, however, are probably not relying on a number rating that can be adjusted, since, according to Rosen, agencies only give them specialty reports that don't include a score. Harvard says their report had no score.

As for Bailey, she still wants the Harvard job, and says there would be "no hard feelings." But first she wants to change the system for herself and others. "I hope I win. It might be beneficial to other people, too," she says.