Sen. Elizabeth Warren introduced a bill that would prohibit employers from running credit checks on job applicants. Reuters

Sen. Elizabeth Warren (D-Mass.) has received an outpouring of praise since Tuesday, when she introduced the Equal Employment for All Act. Co-sponsored by six fellow Democrats, the legislation would effectively prohibit employers from requiring job applicants to disclose their credit history as part of the application process.

The announcement on Warren’s Facebook page has been shared more than 4,800 times, with the majority of the 1,200-plus commenters expressing strong support for the idea. Many say it’s an idea that’s long overdue.

“I so agree with this,” one commenter wrote. “I was astounded when I was looking for a job and told that I had to submit to a credit report, which is none of anyone’s business. Moreover, if one has ‘poor’ credit, perhaps a job would help them pay off their bills?”

Warren said in a statement that the practice of checking job applicants’ credit reports can create a vicious circle for poorer workers who fall into a financial hole and then are unable to procure the employment they need to dig themselves out. She argued that poor credit reports are often the result of unpaid medical bills, prolonged unemployment or even basic errors, which can be difficult to fix. She said these issues disproportionately affect poor and minority workers.

So why would anyone want to keep a system that unfairly stacks the deck against people with poor credit? One sector that has a stake in the status quo is the consumer-reporting industry, which includes the four major credit bureaus, Equifax Inc. (NYSE:EFX), Experian plc (LSE:EXPN) and the privately held TransUnion LLC. These for-profit agencies make money selling consumer data, after all.

The Consumer Data Industry Association (CDIA), the trade association that represents the credit bureaus, has no official position on Warren’s bill yet -- it was introduced less than 24 hours ago. But in a phone interview, Norm Magnuson, vice president of public affairs for CDIA, said the group generally supports employers’ right to use credit reports as a way of gauging the qualifications of potential employees. “We feel that employers ought to be able to use that information -- that data -- which could impact not only their business model but also their employees,” Magnuson said.

Magnuson said that some news reports about the new bill contain misinformation, suggesting that employers are using credit scores -- the often-dreaded number used by lenders, landlords and others to determine your credit worthiness -- to screen job applicants. But credit agencies have long insisted they don’t sell credit scores for employment-screening purposes. They sell a modified version of your credit report, which contains detailed information about your credit history, but not your score. “Scores aren’t used for employment in any way shape or form,” Magnuson said.

Magnuson said it’s not minor information about how you pay your bills that employers are worried about, but serious red flags like tax liens or court judgments, which could show a pattern of irresponsible behavior. “So if you missed a few payments on your credit cards, they don’t really care about that,” Magnuson insisted. “What they do care about is that you have problems with the IRS, or if you have a bankruptcy. Those are pretty serious.”

An employer must obtain permission from a job applicant to review his or her credit report, and must inform the applicant if he or she was turned down because of something that appeared on the report. Ostensibly, applicants do have an opportunity to explain any known errors or delinquencies on their credit reports, but with the job market as competitive as it is, it's easy to imagine that an employer might choose an equally qualified candidate with an unblemished credit history.

A 2012 survey by the Society of Human Resources Management found that 47 percent of employers now use credit checks when hiring for some or all of the positions at their firms. Magnuson downplayed that figure and said that many of the employers surveyed did not use credit checks for all applicants. He said it all comes down to the type of job you are seeking out -- the more responsibility, the more likelihood a poor report could count against you. “If you apply to a bank as a teller, probably it’s going to impact you if you have information like that on your credit report,” he said. “If you’re looking at a custodial job, it’s probably not a big issue and they don’t care.”

Many workers’ rights and privacy advocates disagree. Sarah Ludwig, co-director of the Neighborhood Economic Development Advocacy Project (NEDAP), told the New York Times in March that many people denied employment because of a credit check are lower-wage workers applying to large retail chains.

The Equal Employment for All Act has been endorsed by more than 40 organizations, including NEDAP. In a statement, Sen. Warren said job seekers should be free to compete on their merits, not on whether they have enough money to pay their bills.

“This is about basic fairness,” she said. “It makes no sense to make it harder for people to get jobs because of a system of credit reporting that has no correlation with job performance and that can be riddled with inaccuracies.”

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