Credit-Card Debt Can Sink Your Credit Score

Photograph by Mike Kemp/Corbis

Your obligations to credit-card companies carry more weight on your credit report than bigger debts, such as home and student loans.

That’s one of the findings from the Consumer Financial Protection Bureau’s new report (PDF) on the credit scoring industry. The study examined how Experian, Equifax, and TransUnion collect and organize consumer credit information that is used to calculate credit scores. To come up with scores, the companies use information from thousands of different sources. Taken together, the score allows lenders to assess a consumer’s likelihood of paying back a loan, whether to offer a loan, and to calculate loan amounts and interest rates. Besides mortgage, auto, and educational loans, credit scores are also often a determining factor in apartment rentals and in hiring decisions (PDF).

Credit-card companies supply most of the information that goes into your credit report, according to the CFPB. Fifty-eight percent of the pieces of information contained in the fine print of the average credit report are furnished by credit-card issuers. Thirteen percent are supplied by debt-collection agencies. Seven percent come from education lenders, another seven from mortgage lenders, and the remaining lines are provided by creditors that make auto loans.

Consumer Financial Protection Bureau Director Richard Cordray said that consumers should view the findings as cause for caution. “Especially around this holiday season,” Cordray said on a conference call with reporters, “consumers may take out a retail credit card in order to save 20 percent off their purchases on a given day. If they are not responsible with that one card, it could end up costing 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.”

When the companies calculate a credit score, being behind on a single mortgage payment counts against a consumer slightly more than being behind on a single credit card, says Jeff Richardson, vice president of public relations for VantageScore Solutions. That company develops score formulas for the three major consumer-credit reporting companies mentioned in the CFPB report (TransUnion and Experian referred queries to VantageScore). If you have a credit score of 760, being 60 days late on a credit-card payment will cause you to lose 70-90 points, the same amount as being behind on a mortgage or car payment. If you have a high credit score of 900, being behind on a mortgage is going to hurt your score slightly more (100-120 points for the mortgage vs. 85-105 for the card).

But since each late card payment counts against you separately, and people tend to have multiple cards, the cards often carry more weight. In other words, being behind on your credit-card payments matters more to your credit score than your consistency in repaying bigger debts, such as home and student loans. “Regardless of the type of account,” says Richardson, “multiple delinquencies are always more severe than a single delinquency. … The impact from becoming delinquent on three bank card accounts would be similar to going delinquent on a mortgage, auto, and credit-card account simultaneously.”

Chi Chi Wu, staff attorney with the National Consumer Law Center, a Boston-based consumer advocacy group, says the weighting system doesn’t always accurately measure a person’s actual creditworthiness. “If you’re looking to refinance,” she asks, “shouldn’t the fact you pay your mortgage on time be more relevant than whether your pay your credit-card bills?”

The report, the first the agency has issued about credit scorers, didn’t say companies had broken the law in their evaluations of creditworthiness. But it did raise red flags about the accuracy of credit scores. According to the report, regulators don’t know the extent to which credit reports contain inaccurate information. They are waiting on the results of a decade-long government study to find that out. The study is expected to come out before year’s end—just as consumers emerge from the holiday season loaded up with more debt.

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