CFPB Urges Credit Score Caution

If you’re thinking about signing up for a retail credit card to save on a big purchase this holiday season, the Consumer Financial Protection Bureau has a message for you: be careful.

That word of caution comes from CFPB Director Richard Cordray, speaking about his organization’s latest report on the credit scoring industry published last week. The study took a look at how Experian, Equifax and TransUnion gather consumer credit card data to create credit scores, and unearthed some interesting findings.

The report indicated that delinquency on a credit card payment can actually do more damage to your credit score than can much larger loans, and that this problem can be compounded by the fact that many people own more than one card. That’s part of the reason why, in an interview with Bloomberg, Corday stressed caution when signing up for credit cards this holiday season.

“If they are not responsible with that one card, it could end up coasting them a lot more down the line when they go to take out a mortgage and that credit card is a black mark on their credit report,” Corday warned.

Cordray’s comments underscore a larger CFPB finding that the Bloomberg article also highlights: credit scores are often weighted too heavily towards credit card payments.

According to the CFP, credit card companies supply 58 percent of the information that goes into a credit report, with 13 percent coming form debt collection agencies. Despite the larger size of other lenders, only 7 percent of the information came from educational lenders, another 7 percent came from mortgage lenders and the remaining 15 percent came from auto lenders.

As Bloomberg explains, being behind on a card payment can hurt you just as much as being late on a mortgage payment if you have an average credit score, and will hurt you only slightly more than being behind on a mortgage payment if you have a high credit score.

As such, a credit score doesn’t always accurately reflect someone’s credit-worthiness: especially if they’re applying for a mortgage or auto loan and not for another credit card.

The CFPB is waiting the results of a decade-long government study on credit scores to determine exactly how much inaccurate information they contain on average, and is expecting the report to come out just before year’s end.

To read the CFPB’s full report, click here. 

To read more of Bloomberg’s breakdown of its credit score finings, click here.