Credit Scores in Business: The Good, The Bad, and The Ugly Deana Wilson

What is a Credit Score? (FICO Score) A credit score is a 3 digit number used to assess a persons creditworthiness. Ranges from or above is considered low risk 599 or below is considered high risk

Contributing factors when calculating credit scores include: Payment history – 35% Amounts owed – 30% Length of credit history – 15% New credit – 10% Types of credit used – 10%

National Distribution

How Credit Scores affect you! Loan approval Mortgage Car loan Credit cards Employment Insurance rates Utility rates

Why Employers use Credit Reports Reduce risk of employee theft Reduce risk of employee leaving for better paying job Reduce risk of blackmail for individuals in security sensitive positions.

Pre-Employment Screening Tool Research does not support employers theories about credit reports as a screening tool. Study by Palmer and Koppes stated that those with a higher number of 30-day late payments had slightly higher performance reviews. Despite research, employers continue to use credit reports.

Employee Credit Reports Employment Credit Reports – do not contain a score Avoid rules, standards, and numeric guidelines Job relatedness Reserve for management positions Document reasons for using credit reports Be familiar with Fair Credit Reporting Act.

Insurance-Based Credit Scores Majority of insurance companies currently use credit scores to determine rates for auto and home insurance. Believe there is a direct correlation between credit score and number of claims filed. Individuals with low credit score appear to exaggerate claims to obtain larger settlements.

Research That Supports Insurance-Based Credit Scores Texas Department of Insurance Federal Trade Commission St. Ambrose University

Critics of Insurance-Based Credit Scores Center for Economic Justice Consumer Federal of America National Consumer Law Center National Fair Housing Alliance

Minority Credit Scores Tend to be lower compared to white and Asian Americans Lower income Higher poverty level Low homeownership rate Less access to credit building services

Affect on Minorities Employer Credit Reports Prevents access to better paying jobs Limits ability to accumulate wealth Limits ability to increase credit score Insurance-Based Credit Scoring Pay higher premiums/rates Increase financial burden No insurance at all

Conclusion Credit Scores should not be used to screen ALL employees More research is needs to determine accuracy of insurance-based credit scoring.