More Bad News For Those With Poor Credit

You can pretty easily imagine the nightmare scenario that too many Americans face in this recession. First, they lost their homes through foreclosure. Then, they lost their jobs too, as a result of the foreclosure-fueled recession. Some consequently had to run up credit card debt that they also couldn't pay. The bad dream gets worse: potential employers are increasingly relying on credit checks for new applicants.

The New York Times reports:

Once reserved for government jobs or payroll positions that could involve significant sums of money, credit checks are now fast, cheap and used for all manner of work. Employers, often winnowing a big pool of job applicants in days of nearly 10 percent unemployment, view the credit check as a valuable tool for assessing someone's judgment.

Employers are being pickier about credit backgrounds. Why? Because they can be. As the Bureau of Labor Statistics reported this morning, there are 14.5 million Americans looking for jobs. One way to shrink your applicant pool down from the flood of resumes you received is to check credit behavior.

Is this fair? I guess it depends on how it's used. If you're talking about a job at a bank, I believe it is. If you're talking about a job in construction, I'm not so sure. It also depends on how carefully these credit reports are read. Why is the individual's credit poor? Did he foreclose because of job loss, or because he knowingly took a mortgage he would not be able to afford? Are his debts medical related or gambling related?

Some of these intangible factors are unclear through a credit report. Just because someone has poor credit does not make her a bad person. But it might make her a bad employee. Companies figure there's no reason to take the risk, since they can just hire someone with good credit easily enough.

This does have some pretty grim implications for anyone unemployed with poor credit. If credit checks become standard practice for employers, then as long as the pool of the unemployed remains large, so will their selectivity based on credit. Only when the pool of unemployed shrinks will that selectivity also vanish. That means those with poor credit will be unemployed for even longer than those with good credit.

I think this is very troubling. If people with poor credit run out of unemployment benefits, but also can't secure credit for basic necessities between when their unemployment payments run out and they eventually find employment, then what will happen? I think their only option, within the confines of the law, would be welfare. That's a much uglier consequence for not paying your bills than most people probably anticipated.

So what can we learn from this? A lesson we all mostly understand, but this reinforces: pay your bills and don't spend money you don't have.