New report explores when consumers apply for credit cards as their credit scores change

Today the Consumer Financial Protection Bureau (Bureau) released the latest quarterly consumer credit trends report (qCCT), which explores the relationship between fluctuations in consumers’ credit scores and the timing of consumers’ applications for credit.  

The ability of consumers to access various types of credit can be affected by their credit scores, as many lenders require a minimum credit score before credit will be extended. Given the critical role that credit scores play in determining access to credit, there has been a push in recent years to make credit scores more available to consumers and to educate them on how their scores are used and calculated. 

The report analyzes data from the Bureau’s Consumer Credit Panel (CCP), a longitudinal, nationally representative sample of approximately five million de-identified credit records maintained by one of the three nationwide credit reporting companies. The report focuses on consumers whose credit scores showed large increases or decreases between 2009 and 2017. 

Key findings include: 

• Although a number of individuals have relatively stable credit scores, about two-thirds of consumers in the CCP experienced large changes (over 100 points) between 2009 and 2017. Among consumers with these large credit score changes, about twice as many consumers experience their maximum score before their minimum score. 
• Consumers with large changes in their credit scores in either direction tend to be younger and have considerably lower credit scores on average than consumers with more stable scores.
• Consumers are more likely to apply for a general purpose credit card (or, much less commonly, an increase in their existing credit limit) as their scores approach the maximum and minimum scores observed for the borrower over the period of analysis.
• Consumers’ application rates drop sharply as consumers reach their minimum scores, and then, after hitting bottom their application rates trend steadily upward.  The decline in application rates around the minimum score cannot be explained by sudden drops in credit scores, nor can it be explained by bankruptcies. 
• These patterns of application rates generally hold regardless of the levels of minimum and maximum credit scores. However, the patterns are generally more muted for those with higher levels of maximum and minimum scores. 

Although a full accounting of the underlying mechanism for the observed changes in the rate of credit card inquiries is outside the scope of the report, the report offers possible explanations of what might lead to them: 

• First, the wider availability of credit scores may lead to consumers being more aware of their changing scores which could then influence the timing of applications for credit. This might explain why the inquiry rates for borrowers with relatively high credit scores tend to be mostly constant over time; such consumers’ scores are high enough that they do not need to strategically time their credit card applications.
• Second, hard inquiries themselves and any new accounts resulting from those inquiries may be contributing to the observed peaks and troughs in credit scores, as both generally result in small decreases in credit scores. The report tests this potential explanation by examining inquiry success rates, or the proportion of credit inquiries that result in open accounts, relative to the timing of maximum and minimum credit scores. The report finds that inquiry rates closely track approval rates, with inquiry rates decreasing at the same time as approval rates are decreasing.   
• Third, marketing by credit card issuers may play an important role in the observed patterns. For instance, if a consumer’s credit score has been rising over time and becomes high enough for the consumer to receive pre-screened credit card offers from one or more issuers, this may lead the consumer to submit credit card applications. This in turn may generate more hard inquiries, thus reducing the consumer’s credit scores and in some cases setting a maximum score.