WASHINGTON — Anyone who has ever applied for a loan or tried to rent an apartment knows the importance of having a good credit score. Yet there is little understanding of how those scores are devised.
A new paper released Thursday by the Consumer Financial Protection Bureau (CFPB) lifts the veil off of credit reporting, revealing that the way consumers use the plastic in their wallets weighs heaviest on their scores.
While that's not surprising, considering that Americans own nearly 610 million credit cards, the finding does cast new light on the gravity of failing to keep up with those accounts.
Researchers at the government's consumer watchdog analyzed hundreds of millions of files submitted by the three largest credit agencies — Equifax, TransUnion and Experian.
Each agency receives updates on more than 1.3 billion individual accounts from some 10,000 companies in a typical month.
More than half of the information on the average credit rating report is supplied by the credit card industry. Credit scores are calculated from the information in the report and then used to measure the likelihood of a consumer repaying his or her debts.
Staying current on payments or reducing the use of credit cards has been difficult for many Americans contending with stagnant wages, unemployment or underemployment, as the Center for Responsible Lending noted in its latest study Wednesday.
The consumer advocacy group, using research from Demos, said about 40 percent of low- and middle-income households rely on credit cards to pay for basic living expenses, such as rent, groceries and utilities.
Medical bills have also become a leading contributor to credit card debt in the aftermath of the recession.
Americans, nevertheless, have managed to pay down high credit card balances coming out of the recession, a trend the consumer lending group partly attributes to credit card reforms.
Price transparency helped by the Credit Card Accountability Responsibility and Disclosure Act of 2009, according to the report, is allowing consumers to better manage their debt.
The CFPB raised concerns that credit scores have the potential to reinforce the effects of discrimination, but stopped short of offering solutions.