Did you see this interesting article in the New York Times last week? Another Hurdle for the Jobless: Credit Inquiries:
…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.
But job counselors worry that the practice of shunning those with poor credit may be unfair and trap the unemployed — who may be battling foreclosure, living off credit cards and confronting personal bankruptcy — in a financial death spiral: the worse their debts, the harder it is to get a job to pay them off…
“If I see too many negative things coming up on a credit check, it’s one of those things that raises a flag with me,” said Anita Orozco, director of human resources at Sonneborn, a petrochemical company based in Mahwah, N.J. She added that while bad credit alone would not be a reason to deny someone a job, it might reveal poor judgment.
“If you see a history of bad decision-making, you don’t want that decision-making overflowing into your organization,” she said.
Obviously this could cause a death spiral for unemployed people with bad credit. If your credit is bad because you are unemployed, how will you ever get employed to pull up your credit if these checks become common place? I’m interested in this because it touches upon three additional things I’ve been thinking about lately, points I’m not sure yet where I stand.
Would employers let a job go vacant because an otherwise qualified applicant had a bad credit score? Could this cause underemployment more generally? It’s a common move to think that labor markets will naturally find whoever is talented, and they’ll be smart enough to determine the signal from the noise when it comes to applications. I think the idea of limited bandwidth comes into play with recruitment – if people get screened on noise, the position may stay empty. I hear something similar to this with the debate that jobs that our grandparents used to be able to do with a high school education now require a Master’s degree. People say “well, if people with a high school education were really qualified, the market would be buying them up at a discount” – and the logic is airtight enough, but it feels like something is off.
A bleg request – does anyone know any Stiglitz-like informational papers/models were bad signals cause an equilibrium in unemployment? Behavioral papers – ones where HR reps not at all-knowing demigods but human beings with limited bandwidth?
Setting the appropriate boundaries of access to the large amounts of personal information in the digital database age is going to be a one of the larger issues for us to figure out. A thought experiment: Should your credit score be available on an internet dating website? In addition to “send a message”, or “send a woo”, buttons on the profile you are checking out, should there be a “request credit check ($15.99)” button?
In terms of efficiency, knowing the credit score and all relevant bank and credit accounts of someone you are going to go a third date with strikes me as much more relevant than knowing the credit score for someone you are hiring to do data entry. Yet the idea strikes me, and perhaps you, as an invasion of privacy. Why don’t we feel the same revulsion for the data entry job?
Poor Credit as Strategic Action
Where do the great blog posts go when they die? From 11/08, Chumpchanger on walking away from your mortgage:
In story after story about the foreclosure crisis, you will find the implicit idea that borrowers who can afford to pay their mortgage should keep on paying it no matter how much their house sinks in value because they have made a promise to pay and to do otherwise would be an abuse of the system.
Propagating this idea is good for lenders and probably good for taxpayers, but basically, it’s nonsense…In practice, this means that a bank that doesn’t want to get bogged down in a two year long morass has little option but to take back the keys, accept a huge loss, and call it even. Is this an “abuse” of the system? I don’t see how. The loss was something that lenders could have anticipated at least as easily as borrowers. The reality is that ordinary people are lousy at figuring out the ins and outs of real estate transactions. Relying on the one act rule to get out of a mortgage is not to abuse the system–it is to use the system in precisely the way it was intended to be used. The reason that the one act rule exists is that lenders and developers have through the years shown a great deal of ability to maneuver unsophisticated buyers into crummy real estate deals. The reason that the one act rule exists is to put the risk of these deals on the lender, not the buyer. The purpose is to discourage bad underwriting, dishonest marketing, and unjustified price inflation by making it very, very hard for a lender to get back the money if they lent more on a mortgage than a house was worth. The system is designed to let people walk away. California has a system that puts a higher premium on keeping people out of debt slavery than avoiding bank losses. I see nothing wrong with that legislative choice.
Bankruptcy and poor credit, and in particular the option to go bankrupt or not pay your bills, is a strategic choice to keep the lenders on the other side honest. We think of it in strictly moral terms – people who don’t pay their bills are monsters etc. etc. But the ability to pay a (huge) penalty and walk away from your bills keeps (or should have kept) lenders from following incredibly terrible deals, using dishonest steering techniques, and justifying it with bad underwriting. It’s like normal game theory – if you don’t have the option to defect, you should expect to get rolled pretty hard by the other party. Co-operation is predicated on the idea that we both have the option to harm each other, and it doesn’t need to be acted upon in order for it to keep both parties in line.
In general, the idea that society would fall apart if we didn’t pay our bills sounds right (and comforting, in a way), but really it wouldn’t. The people on the other side of your bill are well aware that you may not pay, and have set up the contract so that you take a big hit too. If you didn’t pay your electric bill, then you don’t have electricity. You may have scammed the electric company for $100, but now you have no power. Same with your phone bill. The electric company is well aware, and has powerful spreadsheets, considering the loss of that $100, and actually it’s already been written up in their losses through probability and expectation calculations.
Yes I know there are people out there who screw up their credit maliciously or accidently. This isn’t a call to arms to not pay your bills – I would say it is a call to arms to lenders and those that extend credit to set up the terms of your contracts to take into account you might not get paid, and get deposits, have markets post collateral, have people ready to threaten a discontinuation of services, etc., but people already do that. Indeed credit card companies are well-known for following the letter of their contracts ruthlessly, and if neoliberalism requires each of us to self-govern as if we were an entrepreneurial firm, there’s every reason for us to do the same.
What happens if poor credit is no longer a negotiation strategy between a creditor and a lender, but instead a more general form of social control?