Link between credit scores and when consumers apply for credit cards examined in bureau report

Potential effects of 'hard inquiries' noted

Consumers’ credit-card application rates drop sharply as consumers reach their minimum credit scores but trend “steadily upward” after they hit bottom, according to a report Thursday from the federal consumer financial protection agency.

Additionally, the report shows that consumers with large changes in their credit scores, up or down, tend to be younger and have “considerably” lower credit scores on average than those with more-stable scores.

These and other findings are presented in the latest quarterly consumer credit trends report from the Consumer Financial Protection Bureau (CFPB).

The report analyzes data from the bureau’s consumer credit panel, (CCP), a longitudinal, nationally representative sample of approximately 5 million de-identified credit records kept by one of the three nationwide credit reporting firms.

The May 2019 report attempts to evaluate the relationship between fluctuations in consumers’ credit scores and the timing of consumers’ applications for credit. Here are more of the key findings:

  • 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 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.
  • As noted above, consumers’ application rates drop sharply as consumers reach their minimum scores, and then, after hitting bottom their application rates trend steadily upward. The report also says the decline in application rates around the minimum score cannot be explained by sudden drops in credit scores or 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.

The bureau says 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, but the report offers possible explanations of what might lead to them. Here they are, in brief:

  • With credit scores more widely available, consumers may be more aware of changes in those scores and may time their credit applications accordingly.
  • Hard inquiries 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.
  • Marketing by credit card issuers may play an important role. The report posits that a consumer whose credit score has been rising may begin receiving pre-screened offers of credit from one or more issuers. If that consumer responds by submitting applications, this could generate more hard inquiries, in turn lowering the score.

Quarterly Consumer Credit Trends: Timing of Applications for Consumer Credit (May 2019)