THE BLOG
06/05/2012 07:46 pm ET Updated Aug 05, 2012

Are Employer Credit Checks Pushing Us Back into a Recession?

Last week, an editorial in the New York Times highlighted a problem that is creating untold misery for millions of Americans: credit checks by employers. In the wake of the abysmal jobs report for May, this issue needs to be examined more thoroughly, and addressed urgently.

Nothing in our system is as damaging as bad credit. Once a creditor puts a black mark on your report, you are screwed for 7 years. Even prison sentences for most crimes are shorter than that. A bad credit history doesn't just prevent you from getting loans but can also destroy your chances of getting a job, which produces a vicious cycle: without a job you can't pay your bills, which damages your credit, which then keeps you from securing employment.

Inability to pay your bills is no badge of honor but neither should it be punished with such brutality. It is disproportionate.

On the surface, the system is defensible -- employers use credit checks to screen candidates for responsibility. The theory is that people who manage their money responsibly will also take their job more seriously and be less likely to steal from the employer. But though the argument is rational, it is also flawed.

After the financial crisis of 2008, millions of people were displaced from their steady jobs and lost their income. At the same time, in a climate of fear and uncertainty, banks, credit card companies, health insurers, landlords, school loan administrators and every other type of bill collector ramped up their efforts to squeeze whatever money they could from those same people. Interest rates on consumer debt skyrocketed, grace periods shrank, and creditors clamped down -- all while the job market plummeted. The net result was severe damage to people's credit without any recourse.

Now, a lot of those people are facing a grim Catch 22. Because of the recession, they lost their livelihood and good credit, and now that damaged credit is preventing them from a finding a job to fix the problem. Some of these people may be financially irresponsible but not all. Most are simply ordinary people who got caught in the crossfire of the subprime mortgage mess and now are being denied a shovel to dig themselves out of their holes. To assume that such people will make bad workers or are more likely to commit fraud is inherently unfair. Not only that, but the weakest members of our society -- minorities and low-wage earners -- who were hit the hardest during the recession, are being pushed further into that hole by employers.

From a moral perspective that is obviously wrong, but even from a practical standpoint it is counter-productive. In order for companies to prosper, the economy must recover; and for that to happen, unemployment must go down and spending must go up. Neither of those can happen if people are denied jobs on the basis of their credit histories; without a job people cannot pay their bills or buy anything, which will then push the economy even lower. Breaking this cycle requires giving people jobs so that they can become responsible members of society again, as well as consumers. By denying opportunity to people on the basis of credit, employers are not only turning away potentially good workers but shooting themselves in the foot.

And if companies do not come to this conclusion themselves, it is necessary to pass laws to ensure that they will. Several states are already doing this but the efforts are insufficient. A lot more has to be done to address this, perhaps even at the federal level, before it is too late. With the economy already teetering on the brink of another recession, we do not need this factor making things worse.