Timing of Applications for Consumer Credit

This is part of a series of quarterly reports on consumer credit trends produced by the Consumer Financial Protection Bureau using a longitudinal, nationally-representative sample of approximately five million de-identified credit records from one of the three nationwide consumer reporting agencies.

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 credit scores are used and calculated. This information may be particularly useful for consumers whose scores change over time. While some consumers' credit scores are relatively stable, many others experience large increases or decreases in their credit scores over time. Whether these large changes are from consumers establishing a credit history or from falling into and recovering from financial difficulties, as consumers' financial circumstances evolve, both their desire to seek more credit and creditors' willingness to lend may change as well. As will be discussed later in this report, this may be the case if consumers are aware of their current credit score.

This Quarterly Consumer Credit Trends report uses the Bureau's consumer credit panel (CCP) to examine when consumers apply for new credit over the evolution of their own credit scores. For most forms of credit, when a consumer submits an application the lender will seek information about the consumer from a nationwide credit reporting agency. This is referred to as a "hard inquiry." This report focuses on hard inquiries for general purpose credit cards made by consumers whose credit scores showed large increases or decreases between 2009 and 2017. The data show that consumers are more likely to apply for a general purpose credit card both as their credit score approaches the maximum and minimum scores observed for the borrower over the period. In addition, there are sharp changes in the rate of credit card applications, as measured by hard inquiries, in the quarters around consumers' minimum and maximum credit scores. The number of credit card inquiries per person decreases by 48 percent between the quarter immediately before consumers' minimum credit score and the quarter immediately after. On the other hand, the number of credit card inquiries per person peaks as it approaches the consumers' maximum credit score and then declines. These patterns are more pronounced for consumers whose maximum or minimum credit scores are relatively low. The report closes with a discussion of some potential explanations for these patterns.

This report uses CCP quarterly archives from 2009 to 2017, covering 36 quarters. All consumers who have a credit score available for at least 29 quarters in the CCP and whose maximum and minimum credit scores are at least 100 points apart are included in the analysis. Importantly, although the sample includes some consumers from the inception of their credit report, for many consumers in the sample their credit history predates the start of the period.

Table 1 summarizes the key features of the sample. The first two columns report statistics for the consumers who meet the sample criteria described above, classified by whether they reached their maximum or minimum credit score first over the period of analysis. For comparison, the final column reports the same statistics for consumers whose credits scores have a range of less than 100 points during the sample period and thus are not included in the main analysis.

TABLE 1: SUMMARY STATISTICS OF CONSUMERS WHOSE CREDIT SCORES CHANGED BY AT LEAST 100 POINTS BETWEEN 2009 AND 2017

 

Max first

Min first

Range < 100

Total number of inquiries

4.2

6.0

2.5

Average credit score over sample period

653.0

664.0

763.7

Max credit score observed in sample

726.3

737.8

767.1

Min credit score observed in sample

557.5

578.1

705.0

Difference between min and max credit scores

168.7

159.8

62.2

Average time between min and max scores (quarters)

10.8

21.9

14.9

Age in 2009

42.7

41.8

51.3

Observations (consumers)

2,746,891

1,393,793

2,355,834

Note: Sample in first two columns restricted to observations with at least 29 quarters of credit scores and with a 100-point or greater difference between their min and max score.

Notably, almost 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. It takes significantly longer for scores to peak than bottom out—on average it takes more than five years for consumers to go from their minimum score to their maximum score, and less than three years to go from their maximum to their minimum. 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.

The remainder of this report focuses on the rate of general-purpose credit card inquiries in the quarters before and after consumers' maximum and minimum credit scores. The remaining analysis does not distinguish between consumers who reach their maximum first versus their minimum first, as Table 1 shows these groups are largely very similar. The patterns in the rates of inquiries examined below are also similar for consumers who reached their maximum first and those who reached their minimum first.

Figure 1 plots the average number of credit card inquiries per person by the number of quarters before or after each consumer's maximum credit score. As most consumers do not apply for a new credit card or credit limit increase every quarter, the average number of inquiries per person primarily captures the likelihood that consumers apply for credit at all, but also adjusts for the number of inquiries per applicant. Note that not all consumers are included in each point in the graph—for example, a consumer who achieves their maximum score in the same quarter that they appear in the CCP for the first time will not be included in the calculation for the periods leading up to the maximum.

Figure 1 shows that consumers in the sample have more credit card inquiries over time as they approach their maximum credit score. However, approximately four quarters before consumers in our sample reach their maximum credit score, the rate of credit card inquiries increases sharply and reaches a peak of 0.09 inquiries per person. After this increase, the rate of inquiries fluctuates between 0.06 and 0.08 inquiries per person over the next few quarters. As shown below in Figure 3, these fluctuations seem to be due to the fact that inquiries from consumers with relatively low maximum scores peak later than inquiries from consumers with relatively high maximum scores. After consumers reach their maximum score, the rate of inquiries declines quickly, starting in the second quarter after the maximum, before leveling out at around 0.05 inquires per person. This 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.

FIGURE 1: AVERAGE QUARTERLY CREDIT CARD INQUIRIES PER PERSON, CONSUMERS WITH LARGE CREDIT SCORE CHANGES, BY QUARTERS FROM MAXIMUM CREDIT SCORE, 2009-2017

FIGURE 2: AVERAGE QUARTERLY CREDIT CARD INQUIRIES PER PERSON, CONSUMERS WITH LARGE CREDIT SCORE CHANGES, BY QUARTERS FROM MINIMUM CREDIT SCORE, 2009-2017

Figure 2 plots the rate of credit card inquiries per person in the quarters immediately before and after each consumer's minimum credit score. Once again there is a general upward trend in the average number of credit card inquiries per person. As with the maximum score, there is a sharp change in the rate of credit card inquiries around the time that consumers reach their minimum credit score.

Credit card inquiries per person peak about two quarters before consumers' minimum credit scores, then fall by roughly half before resuming a steady upward trend. This 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.

Together, Figures 1 and 2 suggest that something happens when consumers approach their maximum and minimum credit scores, which leads to a sharp change in the likelihood of applying for a new credit card or credit limit increase. Figure 3 provides some additional insight into where this pattern comes from by breaking consumers out into groups based on the levels of their maximum and minimum credit scores.

FIGURE 3: AVERAGE CREDIT CARD INQUIRIES AROUND CONSUMERS' MAXIMUM AND MINIMUM CREDIT SCORE, BY THE LEVEL OF THE MAXIMUM AND MINIMUM.

The top panel of Figure 3 shows inquiries per person before and after consumers' maximum credit score, broken out by bands of the maximum credit score. Consumers with credit scores below 720 points experience an increase in credit card inquiries around their maximum score. The increase and subsequent decline is similar for consumers in each maximum-score band below 720. On the other hand, consumers in the two highest credit score groups have generally stable inquiry rates regardless of timing from their maximum and experience small declines in inquiry rates as they approach their maximum scores.

The bottom panel of Figure 3 shows inquiries per person before and after consumers' minimum credit scores, also broken out by bands of the minimum credit score. Around consumers' minimum scores, there is a decrease in credit card inquiries for each credit score group. This decline and the subsequent recovery becomes increasingly dramatic across the different credit score groups, with the sharpest decline occurring for consumers with the lowest minimum scores. Unlike with the maximum scores, consumers in the two highest score groups have fairly similar patterns of inquiry rates, albeit more muted than for lower credit score groups.

Finally, we turn to a discussion of what might lead to the observed patterns in the rate of credit card inquiries, although a full accounting of the underlying mechanism is outside the scope of this report. One possible explanation for the sharp changes in inquiries is that consumers are aware of their credit scores. There has been a general push in recent years to provide credit score information to consumers, with several financial institutions, financial management companies, and nonprofit counselors providing their customers or clients with free access to credit scores. 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.

In addition, it is possible that inquiries themselves and any new accounts resulting from those inquiries lead to peaks and troughs in credit scores. 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. This explanation can be tested to an extent by examining the success rate of credit card inquiries, that is, the proportion that result in newly opened credit card accounts. If changes in inquiries are leading to peaks and troughs in credit scores, we would expect to see that the inquiry success rate tracks the patterns in the number of inquiries.

FIGURE 4: INQUIRIES SUCCESS RATES (PROPORTION RESULTING IN OPEN ACCOUNTS), RELATIVE TO MAXIMUM AND MINIMUM SCORES

Figure 4 shows the proportion of credit inquiries that result in open accounts over time, relative to consumers' minimum and maximum credit scores. The timing of the changes in success rate are consistent with the explanation that inquiries and new accounts lead to peaks and troughs in consumers' credit scores. The left panel of Figure 4 shows that the proportion of inquiries that are successful peaks around the quarter of the maximum score, while the right panel shows that this proportion begins a sharp decline in the quarter before the minimum score.

Lastly, marketing by credit card issuers may play an important role in the timing of credit card inquiries. 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.

This Quarterly Consumer Credit Trends report serves as a starting point for further research on the timing of applications for consumer credit. More analysis is needed to better understand what leads consumers to apply for credit, and how this varies as their credit scores evolve. In particular, more research is needed to determine how the recent increase in the availability of credit score information has influenced consumers' decisions of when and whether to apply for more credit.