Unemployed and Taking on Debt to Stay Afloat? Don’t Expect to get a Job
There are about 14 million people unemployed in this country, and 6.2 million of them have been unemployed for more than 27 weeks. Where should they turn when they’ve lost a steady paycheck, but still have to keep up with bills such as mortgage payments, student loans, and the basics like rent and food? With no money coming in, many understandably have to turn to debt.
But taking on debt — and being unable to pay it back, or pay back any of the debt they may have took on when things looked better and they had a job — could be the exact thing that keeps the unemployed from becoming re-employed. In a massive Catch-22, many employers are looking to credit reports when they do background checks on prospective employees, and a bad mark due to an unpaid medical bill or lapsed student loan payment could make the difference in getting the job. In 2010, The Wall Street Journal reported that more employers are relying on these checks before making hires. Nothing has changed in the intervening year — except perhaps that the problem is getting worse. Marketplace recently told the story of Sarah Sholar, just one of those employees with bad credit who has been turned down by prospective employers. “I can’t pay my student loans because I don’t have a job,” she told them. “I can’t get a job because I can’t pay my student loans.”
The companies in charge of reporting on consumer credit records are extremely opaque and have little oversight. Some studies found that 25 percent of credit scores — based on credit reports — have errors in them. More than 20 million Americans may have material errors on their credit reports. And good luck trying to fix errors — or to even figure out how these scores are calculated. Both will lead you down a labyrinthine path.
But it’s not just consumers who get suckered by reporting agencies. As Amy Traub wrote in The American Prospect, “Credit checks have been aggressively marketed to employers by for-profit credit bureaus,” but “[t]he only available rigorous study of employment credit checks concluded that there’s no correlation between credit history and job performance.” Even those who are concerned about whether to trust a new employee with fiduciary responsibilities may not learn much from a credit report when trying economic times have landed even the most responsible people in difficulty. On top of this, because African Americans and Hispanics, for a variety of reasons, disproportionately have low credit scores, they can be excluded from jobs that run credit checks, leaving the door open for discrimination charges. In fact, as Traub points out, Bank of America was found to have discriminated against African Americans in just this manner in 2010, and there’s such a case pending against Kaplan Higher Education Corporation.
So why have the credit reporting agencies pushed employers so hard to use this information? There’s good money in credit reporting, and the business segment growing fastest is consumer reporting. About 600 credit reporting agencies, along with 4,500 credit collections agencies, generate annual revenue of $20 billion in the U.S. The top four reporting agencies — Equifax, TransUnion, FICO, and Experian – bring in $1.8 billion, $1.2 billion, $744 million, and $282 million in annual sales, respectively.
But the larger problem with this practice is that it is based off the tired assumption that getting into debt is a reflection of bad character, not the inevitable result of a bad economy coupled with tricks and traps employed by banks to keep consumers in debt. The WSJ article explains that the rise in employers who check credit reports for prospective employees is due to concerns “about rising rates of employee theft and fiduciary issues” and that “[c]ompanies say the financial information can offer insight into a candidate’s level of responsibility.” But in reality, anyone can lose their job these days and fall behind on bills. Many people were seduced into subprime products before the boom without fully understanding the traps they were getting into. And long before that, wages were falling for the past three decades, so families have had less and less to spend on basics like food and shelter — leading to the need to take on debt to plug the gaps.
The stigma around being in debt is unfair at any time, but is even more distressing when the economy has landed so many in financial disaster. If these very financial difficulties then keep people from getting the jobs that can help pull them out of the morass, there will be no lifeline left.
Bryce Covert is Assistant Editor at New Deal 2.0.