7.2c Credit Scores and Credit Reports
Credit scores are statistical estimates based on financial factors. These factors include payment history and debt. Financial institutions use these factors to decide whether an individual is eligible for credit, the amount of credit they are granted, and the interest rates they are charged (Kiviat, 2019b). Various “gatekeepers,” including employers, landlords, and insurance companies, use credit scores to evaluate job applicants, decide whether to rent to someone, and set insurance rates. They believe these numbers predict borrowers’ future spending behavior. That is, if someone has good credit, they will continue to make sound financial decisions. If someone has poor credit, the assumption is that they will continue to make poor financial decisions, such as not paying their bills.
A credit score is one data point in a credit report. Credit reports are documents that have detailed information about an individual’s financial matters. They include information about the person’s credit accounts (credit cards, student loans), credit inquiries, money-related public records (bankruptcies, lawsuits), and any collections of overdue bills. Utility companies, housing rental companies, banks, employers, and insurers use the contents of credit reports to decide whether to extend everything from credit to job offers. Thus, a poor credit score can have far-reaching negative effects on an individual.
About half (51%) of U.S. employers use credit reports to make decisions about hiring an applicant (HR Research Institute, 2021). Research, however, does not find that credit reports predict behavior (Kiviat, 2019a). Kiviat (2019a) conducted 57 interviews with hiring professionals and found that when credit reports included debts, they sought to understand the context and asked job applicants about the debt to decide its legitimacy before making a hiring decision. For example, hiring managers viewed medical debt, but not credit card debt, as justifiable.
In another study, researchers conducted an experiment where they asked 1,050 hiring professionals to review an application for an assistant store manager position (O’Brien & Kiviat, 2018). The application materials were fictitious and varied on three factors: credit reports, race, and gender. The credit reports differed to show good, poor, and no credit. The researchers signaled race and gender by using names commonly associated with Black or White men and women. They found that lower credit scores hurt women and Black candidates. Hiring managers were less likely to recommend them for employment and offered lower starting salaries when they did.
Most U.S. states have no restrictions on employers’ use of credit reports when making hiring decisions. Friedberg et al. (2021) analyzed the effect of other states’ limiting credit checks in hiring and found that it helped applicants, especially those more likely to have lower credit scores, such as individuals who were unemployed and reported trouble paying their bills. In states with limits on credit checks, this group was 28% more likely to find jobs. Further, the data suggests they were more likely to find stable employment than similar individuals in states without such limits.
Credit scores are believed to reduce racial and gender bias because of their quantitative nature. Research finds, however, that poor credit may hurt White men less than White women and Black men and women (O’Brien & Kiviat, 2018). Moreover, individuals facing economic hardship are also disadvantaged in the hiring process (Friedberg et al., 2021).
Photo 7.7
U.S. Households Are Increasingly Reliant on Credit
Access to credit and the use of credit reports matter because U.S. consumers’ reliance on credit (loans) has expanded. U.S. households are reliant on credit to make ends meet because the U.S. government has not increased taxes or spending on social welfare programs. Wiedemann (2022) found that households in states with lower unemployment benefits are increasingly using credit cards to make ends meet. As a result, most U.S. households have debt.