FICO Frenzy

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There was a great deal of back-and-forth in the left half of the blogosphere this weekend over employers who use FICO scores as a way of weeding out job candidates.  In a sort of peculiarly American fashion, our nation seems to have decided that one's credit history is a good proxy for one's worth as a human being, and thus should be used to determine eligibility for everything from employment to excellent rates on car insurance.

I have no trouble believing that the FICO score is often a proxy for what some researchers call conscientiousness; I've certainly had roommates and others around me who had terrible credit because, well, they didn't bother to pay their bills, and regarded rent as something optional that could be turned in if no more exciting commercial opportunities immediately presented themselves. 

That said, it's going to be at best a weak proxy.  It's also a proxy for things that, as a society, we may not want employers to consider, like a past history of depression.  And for things that have nothing to do with your job performance, like a car accident that left you with huge medical bills and no job, or a sudden job loss.  Looking at our national savings rate, lots and lots of Americans live very close to the edge of their paychecks; they can't all be terrible employees.

There does not seem to be much data showing that, in aggregate, people who have poor credit do not make good employees.  There doesn't even seem to be much data showing what I would have thought would be the more likely problem, which is that people who have a whole mountain of unpayable debt might be tempted to dip into the till.  I could still see running credit checks on people who have access to either a lot of company secrets, or a lot of cash:  bank tellers, comptrollers, IT security folks, the executives.

But I sort of suspect it's not the CFO who has to submit to the indignity of having HR paw through his credit card utilization and unpaid library fees.  I know that some jobs in the financial industry run these checks, but mostly it seems to be people hired for entry level, dead end jobs--the kind of people who have little scope to steal, but also, little bargaining power. 

The question is, should the government stop it?  Perhaps unsurprisingly, I don't think so.  For one thing, an absence of data doesn't indicate that these scores don't work; it just means we don't know.  If we think it's a stupid metric, the easiest thing to do is commission some research pointing that out, and publicize it.

Beyond that, we also don't have any data showing that this is a large and widespread problem worthy of regulation.  How are employers using these things?  Are they refusing to hire folks with credit below 750, or are they weeding out the guy who hasn't paid a bill on time since 1979?  

I've no doubt that there are a few people out there who have been unjustly hurt by this; but we cannot regulate every bad business decision that hurts a few people.  Each regulation may sound fine on its own, but collectively, they massively raise the compliance cost of starting a business and hiring workers, two things we want to support.  So we need to set some sort of bar to ensure that we're only regulating things that have substantial, widespread negative impact.

Moreover, whatever problem there is is probably at its worst now, because jobs are scarce and workers plentiful; when the economy recovers, most people will be able to find a job without intervention.  In the meantime, I'd rather see our energy focused on longer-term, more generous unemployment benefits that might keep some people from trashing their credit while they look for a job.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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