It’s true – the way you handle your credit cards accounts for 60% of your credit score. This, according to a new study from the Consumer Financial Protection Bureau, is just one more reason why choosing which credit cards you carry in your wallet is so important. It’s also revealing in other ways, too and opens up a lot of questions; for instance: why don’t our mortgages have a bigger effect?
In its report, CFPB took a long, hard look at data submitted by the the big three credit bureaus, including TransUnion, Equifax and Experian. Between the three “big daddies”, they have the goods on more than 200 million Americans. What it found was a disproportionate focus on credit cards versus other debt, including our mortgages, student loans and other personal loans.
As we know, the credit bureaus collect, enter and then feeds every consumer’s unique information into an intricate formula process that then computes our credit scores. Those scores are those three digit numbers that basically determines whether we’re approved for other financial products, how much we pay in car insurance and even whether or not we land that highly coveted job.
The CFPB found that 40% of the information the credit bureaus get comes from general purpose bank credit cards, such as Discover, Visa, MasterCard and American Express, while another 20% comes from those specific credit cards that can be used only in certain retail stores or gas stations. Here’s where it gets good, though: our mortgages account for just 7% of the determination factors and our car loans and other personal loans accounts for less than 5%. The rest is made up of other dynamics, such as bankruptcies, student loans and other financial considerations.
- Only 20% of those with credit reports bother to check those reports, meaning a massive number of American consumers could have errors on their reports.
- Banks have the biggest influence over our scores because all three bureaus give considerable weight to what they report.
- If more consumers checked their reports and then made steps to remove those errors, they could save thousands every year in interest.
- Close to 25% of credit reports contain “significant” errors.
- In 2011, consumers disputed more than 32 million items in their credit files and nearly 40% of the disputes were related to debt that’s now in a collection phase.
- Debt in collections is five times more likely to be disputed than mortgage information.
Richard Cordray, Director of the Consumer Financial Protection Bureau, says
The most effective way for consumers to identify errors in their reports is to obtain copies of them and review them.
He goes on to say that when routine checks of credit reports aren’t made, they can haunt consumers for years and worse, they will pop up when least expected – specifically when that consumer is attempting to buy a car, home or qualify for a credit card. This could mean consumers miss out on because they must take time consuming steps to have the errors removed from their credit reports. Worse, if their identity has been compromised, it can take even longer to repair. As a result, consumers are paying far more in interest than what they need to pay.
Cordray also said that consumers should request their credit reports from the three major bureaus once a year. Under federal law, consumers are entitled to a free credit report – one from each bureau – every year.
There’s another alarming find in the report. Credit bureaus resolve only about 15% of disputed items themselves. The other remaining 85% is passed on to the furnishers. Remember all of that documentation you sent to the bureaus? Odds are, it was forwarded to the creditor. The bureaus then wait to hear back from those creditors – which plays a role in how they ultimately rule.
The CFPB now offers a database for consumers who wish to report errors on their credit reports but have been unable to rectify. Cordray encourages consumers to try to resolve it with the bureaus before bring CFPB in, but if that fails to work, they’re encouraged to file a complaint. The bureau will then investigate. Scott Pluta, who is the assistant director for the Office of Consumer Response at CFPB sums it up nicely:
Credit reports affect whether or not you are able to get a credit card, a home loan, an auto loan or a student loan, the ability to rent an apartment or get hired…It also can affect how affordable or expensive those things are for you.
Before you assume CFPB is just another government agency, you should know remarkable strides have been made in the financial sector as a result of this agency. During the first three months of business, it collected 5,000 complaints on credit cards alone. Within months, those complaints, which included fraudulent charges to consumers’ credit cards made by third parties that the card companies allowed, were addressed with three of the nation’s biggest credit card companies being forced to pay back their customers as well as hefty fines for stepping outside the legal parameters of doing business. Not only that, but in some cases, criminal investigators were brought in to confer with the bureau.
Because credit cards play such a significant role in how our credit scores are calculated, it’s more important than ever to understand the newly written terms and conditions and revamped monthly statements we all now receive. Bottom line is there are big changes in the American financial sector; some political and some simply because consumers are taking a stand and demanding better. Either way, the CFPB is a part of the changes that are ongoing and from the results of its first couple of years, it’s little wonder the big banks are threatened and were hoping Obama would be voted out; had Romney claimed victory, the bureau probably wouldn’t still be in existence.
What are your thoughts on the weight credit cards have on our credit histories? Have you filed a complaint with CFPB? If so, let us know your experience. We want to hear from you.