On May 30, 2019, the Consumer Financial Protection Bureau (CFPB) published a quarterly report titled Timing of Applications for Consumer Credit. The report examines the rate of general-purpose credit card inquiry rates for consumers whose credit scores have seen large fluctuations (100 or more points) during roughly a 7-year period. The report finds some noticeable trends in the rate of these inquiries around the time that the sample population reaches its maximum and minimum credit score, and the report provides three potential explanations for these trends.
The report opens with statistics about the sample population, as shown below:
The CFPB breaks this data down as follows:
[A]lmost two-thirds of the sample experienced at least a 100-point swing in their credit score between 2009 and 2017. Among consumers with these large credit score changes, about twice as many consumers experienced their maximum score before their minimum score. However, consumers with large credit score swings look similar regardless of whether the maximum or minimum score is observed first. Notably, average scores are similar, as are the ranges between maximum and minimum scores. Consumers who reached their minimum first tend to be slightly younger. […] Consumers with large credit score swings also look notably different from consumers without large credit score swings. Consumers with large changes have considerably lower scores on average and are younger than consumers whose credit scores are more stable.
Trends in Credit Card Inquiries in Relation to Maximum Credit Score
In general, the report notes more credit inquiries over time as the max credit score is reached and sharply decreases afterward. The drop of credit card inquiries after the peak credit score “suggests that consumers are relatively less likely to apply for a new credit card or an increased credit limit after they reach their maximum score.”
Trends in Credit Card Inquiries in Relation to Minimum Credit Score
There appears to also be a sharp decline in credit card inquiries at the time that consumers reach their minimum credit score. According to the report, “[t]his sharp drop in credit card inquiries is not caused by consumers who experience a rapid drop in credit score immediately before their minimum score, nor is it caused by consumers who have filed for bankruptcy.” A footnote further explains, “In analysis not shown here, we found that the same general upward trend and sharp drop around the minimum credit score appears for consumers with and without large (i.e., greater than 100 points) credit score declines in the quarters immediately preceding their minimum credit score, and for consumers who have and have not filed for bankruptcy in the quarters immediately preceding their minimum credit score.”
Breakdown of the Data Above by Credit Score
The report goes on to break down the two above trends by credit score range. The below charts show that those with the highest range of credit scores (780+) had a more stable rate of inquiries around the time of their maximum credit score. However, those with higher credit scores (660+) saw a similar trend in credit inquiries as those with lower credit scores around the time of their credit score’s minimum.
Potential Explanations for These Trends
So what happens that causes the sharp changes in the likelihood of applying for a credit card or credit limit increase as consumers with large credit score variations approach their maximum and minimum scores? The CFPB provides three potential explanations.
First, the CFPB notes that these trends might be caused by consumers being more aware of their credit scores. The report explains:
If consumers are aware of their changing scores, they may be more likely to apply for a new credit card once their scores have risen high enough to qualify for a card with a lower Annual Percentage Rate (APR) and more likely to stop applying once their scores have sunk too low to have a realistic chance of being approved for a new card. 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, the actual credit card application inquiries, which result in hard credit inquiries on the consumer’s credit report, might be causing the fluctuations. The CFPB states:
Commercially available credit scores generally have a small penalty for making hard inquiries, as well as for opening new accounts. If a consumer’s credit score rises over a period of time, applying for and opening a new credit card might cause the credit score to fall—leading to the maximum we observe in the data. Conversely, if a consumer’s credit score is falling over a period of time, in part due to credit inquiries, having fewer credit inquiries might lead to the consumer’s credit score increasing from their minimum.
Third, the report notes credit card companies’ marketing strategies might play a role in the number of inquiries. The report explains:
Issuers often use credit scores among other factors to decide who receives prescreened direct marketing for credit card offers. As a result, it is possible that a consumer’s score reaches a maximum or minimum, in part, due to the consumer’s credit score crossing a threshold used by issuers for marketing and, consequently, the consumer starts or stops receiving credit card offers. For instance, if a consumer’s credit score has been rising over time and becomes high enough for the consumer to receive credit card offers from one or more issuers, this may lead the consumer to submit credit card applications, thereby generating more hard inquiries, and thus reducing their credit score and setting a maximum score. Conversely, a consumer’s credit score may be declining over time in part because they are responding to marketing offers, until their credit score becomes too low to receive any more offers, which in turn allows the consumer’s credit score to rise and set a minimum score. The fact that the sharp changes around minimum and maximum scores are more pronounced for consumers with very low maximum and minimum credit scores would be consistent with this explanation—creditor marketing criteria are likely more clear-cut for this group, such that transitioning into or out of a deep-subprime credit score category would lead to a sharp change in the volume of credit card marketing a consumer receives.