Consumers Monitoring Credit Scores Perform Differently, Impact on Behavior Questioned

A paper released by the Federal Reserve Bank of Philadelphia, “Can Credit Cards with Access to Complimentary Credit Score Benefit Consumers and Lenders?  discusses the growing trend by lenders to provide consumers with free access to credit bureau based credit scores. The paper references material presented by Paul Wilmore of Barclaycard U.S. at a November 2014 Payment Cards Center workshop conducted at the Federal Reserve Bank of Philadelphia. Barclaycard’s findings illustrate that customers enrolled in their program exhibit different behavior on their credit card prior to and throughout the first nine months of participation than non-enrollees.

Unlike other issuers that provide credit bureau based scores on customers’ monthly statements, Barclaycard’s program requires customers to enroll online to view their scores. This approach provides an opportunity to view how consumers enrolled in the program behave with their credit cards compared to customers that opted not to participate in the program. When looking at divergence in behavior between enrollees and non-enrollees prior to and during the first nine months in the program Barclaycard’s presentation showed that “program participation is correlated with increased card spending, decreased credit utilization and delinquency, increased digital engagement, and lower cardholder attrition.” However, as the author acknowledges, Barclaycard’s analysis was not a randomized controlled test so the effect of access to one’s credit score on changes in credit behavior cannot be distinguished between treatment effects and selection effects (that is, is there something special about the consumers who choose to enroll in the program).

Credit Bureau Based Scores are Only Part of Financial Literacy

Although not specifically mentioned, the paper suggests that Barclaycard’s rationale for implementing the program “emerged from earlier bank initiatives aimed at educating consumers and increasing their financial management and engagement.” According to Barclaycard this literacy initiative “fits well with a regulatory focus on increasing the transparency of credit information to consumers and fostering a better understanding and usage of their credit products.” Providing cardholders access to their credit bureau based scores and information about the contributing factors to their credit score is one component of Barclaycards literacy program which “offers online communities of users that allow cardholders to set credit score goals, commit to those goals, and receive peer-to-peer advice and support from other community members.” It is unclear what other information Barclaycards provides to enrollees besides a credit bureau based credit score and two of the factors contributing to the score.

With the U.S. White House and federal agencies asking for lenders to provide transparency into their credit lending practices and ways to promote financial health and education for U.S. consumers, one opportunity to improve financial literacy among consumers might include dialogue about the use of proprietary behavioral scoring systems. More predictive than credit bureau based scores, behavior models are based on how credit card holders use their credit card and repay their obligations with the lender. Behavior models play a more important role in determining a cardholder’s credit limit, interest rate and prospect for future credit limit increases than credit bureau based scores. By understanding which behaviors such as cash advances, not paying off the entire balance due, or paying late adversely affected their behavior score, consumers may possibly obtain a more immediate and appreciable understanding about which behaviors lead to higher interest rates and lower credit limits.

Not Enough Emphasis on Explaining Risky Behavior Associated with a Particular Credit Score

When discussing credit behavior there appears to be too much emphasis on someone’s credit score and not the risk associated with certain behaviors. Instead of telling someone what their credit score is, it might be more helpful to inform consumers the effect certain credit behaviors may have towards an increased likelihood of poor future credit performance.  For instance, when providing one’s credit score and the most significant factors contributing to the score, a description as to how that behavior increases one’s likelihood of poor credit performance may be more meaningful. For example, instead of just telling the consumer their credit score and the main contributing factor to their score is “too many active bankcards” an additional statement such as “By eliminating one bankcard your risk of delinquency may be reduced by X%.”

Access to Credit Bureau Based Scores is a Good Start But Far from the Goal Line

Given the industry’s previous long standing practice of keeping credit scores hidden from consumers, providing access to credit scores is a good first step towards removing the mystery behind credit scores and might be the carrot to incent more consumers to learn more about ways to improve their credit risk profile. But until more emphasis is made towards explaining how certain behaviors lead towards increased risk of poor credit performance the goal of improved credit literacy and financial health for many will remain a distant reality.

*Chet Wiermanski is a visiting scholar with the Payment Cards Center of the Federal Reserve Bank of Philadelphia. The views expressed here are those of the author and do not reflect the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System. No statements here should be treated as legal advice.

Wiermanski 200Chet Wiermanski is one of BIIA’s contributing editors writing on the subjects of credit scoring and decision systems. *He is a visiting scholar with the Payment Cards Center of the Federal Reserve Bank of Philadelphia. The views expressed here are those of the author and do not reflect the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System. No statements here should be treated as legal advice. Additionally, Chet is Managing Director of Aether Analytics which specializes on leveraging hidden data sequences and time series components within consumer credit information typically ignored by traditional credit bureau based solutions. Previously Chet was the Global Chief Scientist at TransUnion LLC. Holding a variety of positions within TransUnion, during his tenure, between July1997 and February 2012, he was responsible for identifying, evaluating and developing new technology platforms involving alternative data sources, predictive modeling, econometricforecasting and related consulting services.