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December 18, 2012

Study: Agencies rely heavily on credit card histories when calculating credit scores

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 too 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.

"Credit cards are given great weight in credit profiles — a lesson that consumers could end up learning the hard way," said Richard Cordray, director of the CFPB, during a call with reporters.

During the holiday season, he said, consumers may be enticed to open a new retail credit card with the promise of an extra discount on their purchase. If they are not responsible with that card, "it could end up costing them a lot more down the line when they go take out a mortgage and that credit card is a black mark on their credit report."

Indeed, but there is a body of research that suggests consumers are relying on plastic for everyday needs, not occasional wants, making the prospect of maintaining a healthy credit profile challenging.

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