The use of credit scoring should be prohibited in hiring practices.

The information that is used to create a credit score is derived from five main areas: types of credit in use (10%), new credit (10%), Length of credit history (15%), amounts owed (30%), and payment history (35%). Credit agencies do not use factors such as gender, race, nationality, or marital status. According to the Fair Isaac Corporation, "non-minority and minority applicants are equally likely to pay as agreed." Even though credit agencies do not directly use the factors listed previously, they still may have an unintended impact upon an individuals credit score. Anytime a person cosigns a loan or shares a joint bank account with someone, they are just as liable and responsible for good repayment. However, credit scoring is being used for more than just determining the financial risk of lending to a person. It is also being used to determine insurance rates, as an aid in employee selection, and in investigations. While the debate continues in the insurance field, a change in how banks and other financial institutions use additional information, such as age, income, gender, and race, came into light. Jo Ann Barefoot explains how the use of credit scoring may cause business to be guilty of one of three illegal forms of credit discrimination. These are: 1) overt discrimination, "where a lender directly and intentionally turns down a qualified applicant or sets adverse loan terms based on a prohibited factor like race or gender" 2) disparate treatment, "where similarly qualified customers are treated differently based on a prohibited factor" and 3) disparate impact, or "the use of a policy or practice that is neutral on its face but has disproportionate adverse effect on a protected group, and that cannot be justified by business necessity." Based on the findings expounded by Mr. Montemayor, a claim for disparate impact could clearly be seen if credit scoring, a "neutral on its face" factor, can cause disproportionate adverse effect. Barefoot goes on to state that "The Justice Department (of the United States) has said there are three types of disparate treatment—underwriting discrimination, pricing discrimination, and marketing discrimination." She goes on to explain that overt discrimination is rare, disparate treatment is often overlooked, but disparate impact will be the next issue affecting the use of credit scoring as standard policy and practice. While Barefoot intended this to affect the domain of financial services and lending, it clearly has extended into insurance underwriting and employee selection. While the use of credit scoring is directly related to financial services and debatable in the venue of insurance underwriting, it has still not been seriously considered in hiring and employment policy. Palmer and Koppes explain that some believe that credit history might have some ability to predict behavior based on three arguments: 1) credit history reflects past applicants conscientiousness, 2) credit history might indicate whether an applicant is currently in financial trouble, and that this could be indicative of the likelihood or temptation to steal or to leave the company for another, better paying job, or 3) to avoid a negligent hiring claim. Essentially, the first two reasons reflect past behavior in an attempt to predict future behavior and performance. The avoidance of negligently hiring someone is partially debunked, since past behavior can only serve as a reason not to hiring someone, such as a conviction listed in a background check. The use of credit history might also reflect other information, valid or invalid to the past behavior of an individual. Situations such as death, divorce, severe disabling accidents (thus affecting a person's ability to work and continue to pay bills), identity theft, behavior of a co-signer, youthful stupidity, and economic shock can skew a person's credit score, thus invalidating a person's perceived propensity to steal or otherwise be a risk to the business. This is also the exclusion of the fact that credit histories often have many inaccuracies unknown to the job applicant. Palmer and Koppes, through statistical evidence, show that there is no correlation between credit history and job turnover for any reason, positive or negative. Ultimately, the two suggest that employers can use any test or predictor they choose, so long as it does not create adverse impact against a protected class. Adverse impact is not illegal in three instances, bona fide occupational qualification, business necessity, and job relatedness. The case of credit scoring as a predictor for employment performance or risk aversion is a stretch in light of similar implications under review in the fields of lending and insurance underwriting. In summary, the use of credit scoring in hiring policy or practice should strongly validate a correlation between credit history and something directly relating to the job. At this time, other indicators should be used that more thoroughly correlate with job performance than credit scoring.