Credit History Not a Good Predictor of Job Performance Or Turnover

Newswise — Wary of making the wrong hiring choices, which can be both costly and time-consuming, companies and organizations are conducting an increasing number of screening measures to weed out those who are unfit for employment.

In addition to the usual checks on past employment, references, interviews and drug screening, a substantial number of employers are checking the credit history of their new hires.

The 2002 National Retail Security Survey of 118 retail companies, conducted by the University of Florida, found that nearly 41 percent did credit checks of prospective workers. In their book "Don't Hire a Crook," Dennis DeMey and James Flowers note that many companies are seeking credit reports on their job candidates. Especially for "management positions and for those who have access to money on the job."

Two Eastern Kentucky University researchers say checking credit history is not a good idea. Industrial and organizational psychologists Dr. Jerry Palmer and Dr. Laura Koppes say credit checks do not have any validity in predicting the job performance of employees.

Their study, which will be presented at the annual Society of Industrial and Organizational Psychology conference in Chicago in April, included examining the credit reports of nearly 200 current and former employees working in the financial service areas of six companies. They sought to determine if the credit ratings, which covered only the two previous years, were an indicator of how well the workers performed their jobs and if they stayed, or were likely to remain, with their organizations.

The results showed that a person's credit history is not a good predictor of job performance or turnover, says Palmer.

Palmer and Koppes concede that some rational arguments can be made for using credit history as part of an employment check. For example, credit history can reflect past conscientiousness and whether an applicant is in current financial trouble. This could be indicative of the likelihood or temptation to steal or leave a company.

In addition, Palmer says credit checks can be used as legal protection should the company be faced with a negligent hiring claim.

"These all seem like good reasons to include a credit check when considering a candidate for employment," Palmer says. "And," he adds, "there may be circumstances when a credit check may be warranted." The Federal Trade Commission in 2002 stated that checking a credit history is not uncommon for some sensitive positions, especially where money is involved.

"The hypothesis of our study was that applicants with good credit reports would, after being hired, receive more positive performance evaluations and would be less likely to be terminated from their jobs," says Palmer.

But that is simply not true, he says.

There is no evidence to show that using credit checks can predict a person's work performance and likelihood of leaving the company, he says. In fact, one aspect of the study revealed that workers with a higher number of 30-day late payments actually received higher performance ratings.

One problem with credit reports is that they only show whether bills have been paid on time. "They do not reflect the circumstances or reasons for the late payments. And there may be some very good explanations that do not show up in the report and which have nothing to do with whether a person is likely to be a good worker or stay with the company," Palmer points out.

"Our study, which examined performance ratings and turnover rates, showed that those who had been tardy in making payments did not have lower performance ratings than those with good credit histories. Nor were they likely to leave the company any more than those with the better credit ratings," he says.

Although not part of their study, Palmer notes two other aspects that should be considered when using credit reports to determine the desirability of prospective job candidates. "If the credit report is not related specifically to the job, then the employer could very well lose a law suit challenging its use as a predictor of job performance or turnover," he says.

Also, there is the possibility that errors exist in a person's credit report. "Credit histories have been known to be wrong," Palmer says, adding that most people do not check their credit history and have no idea what is contained in those records.So, it would be a good idea for people to call their credit bureau and make arrangements to see their credit ratings. That is particularly true if they are applying for a job and know that the company uses credit reports when checking the background of potential employees.

On the other hand, Palmer says that if companies use credit reports to screen potential employees, they should know that a blemished credit rating does not necessarily mean that the person will be a poor employee.

The Society for Industrial and Organizational Psychology (SIOP) is an international group of 6,000 industrial-organizational psychologists whose members study and apply scientific principles concerning people in the workplace.

From April 2-4, 2004, SIOP will be holding its annual meeting in Chicago, IL. More than 3,000 top workplace scientists and practitioners will attend and present research on emerging trends, debates and the way people function in the workplace.