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Consumer Credit

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Anonymous
Not applicable

Consumer Credit

I have been around the forum and I have noticed that many say "consumer credit" trades often ding credit rather than improve it. I am curious as to why as well as what constitutes a "consumer credit" TL. Is that like an Amazon store card or Discount Tire card? I have those lol

Message 1 of 25
24 REPLIES 24
Anonymous
Not applicable

Re: Consumer Credit

I'm not sure I've seen "consumer credit" mentioned and that it dings your credit.

 

A consumer card would be any credit card intended for general, personal use (Visa, store cards, gas cards etc). As opposed to a business card, installment loan, mortgage etc. 

 

Consumer Credit Counseling would certainly ding your credit.

 

Are you referring maybe to store cards? Store cards do not necessarily hurt your credit; but you shouldn't open a ton of store cards when building or rebuilding your credit for a variety of reasons: low credit lines, opening too many cards in a short time period lowers your average age of account etc. In the threads about 2 years ago many rebuilders here were going completely ape over Comenty's "shopping cart trick" store cards; essentialy this involved going to a retailers website that offered a Comenty-issued store card (Pottery Barn for instance); placing a product into your cart, and start to check out (ie enter your name and address); click next and then often times this would result in a pre-approved offer for that retailer's store card and if approved there was no hard inquiry. Fine once or twice but some people overdid it and ended up with a ton of worthless store cards. I absolutely do not recommend this and it has died down lately. 

Message 2 of 25
FinStar
Moderator Emeritus

Re: Consumer Credit

Unless you mean "consumer finance" tradelines OP? CitiFinancial (or similar), for instance.

Message 3 of 25
Anonymous
Not applicable

Re: Consumer Credit

Maybe that is what I was seeing.. sounds more right sorry for the confusion. 

Message 4 of 25
Anonymous
Not applicable

Re: Consumer Credit

I think the OP means consumer finance accounts. The consensus is that those accounts are usually used by those who don't have the best credit and have few options.

Message 5 of 25
Anonymous
Not applicable

Re: Consumer Credit

Yea so why would that be "bad" for ones credit?

Message 6 of 25
Anonymous
Not applicable

Re: Consumer Credit


@Anonymous wrote:

Yea so why would that be "bad" for ones credit?


CFAs (Consumer Finance Accounts) are considered "last resort" sources of credit.  Historically, they were always the types of accounts that people would use because they couldn't secure other (better) lines of credit.  For example, they couldn't get a real credit card to use to buy furniture, so at the furniture store the sales people would push them to use their store financing, which is a CFA.  FICO doesn't like to see CFAs simply because it suggests that someone had to use a poor type of credit to get something.  Whether or not any of this is true these days is arguable, but that's how the algorithm views them.

 

Years ago I used a CFA simple because the slippery eel salesman in a store talked me into it.  I had cash in hand to make a purchase of about $2k, but he was like "use our financing, it's 0% for a year and just pay it off early, it will help your credit."  Before I was credit-savvy, I took the bait and went for it.  I did pay it off early (like 6 months) but still I was stuck with a CFA on my CR.  Ironic that what the guy said would help my credit actually hurt it if anything! 

Message 7 of 25
Anonymous
Not applicable

Re: Consumer Credit

The full name is a Consumer Finance Account or a CFA.  There are explicit negative reason codes that refer to them (these are the typically four reasons FICO gives of what is hurting your score).  Note that the CFA could be well-managed, never late, etc. -- the mere presence of a CFA harms your score.

 

You have asked two questions:

     (1) What exactly is a CFA?

     (2) Why should FICO penalize you for seeing a CFA on your report?

 

 

ANSWER TO #1:

 

A finance company account occurs when you want to buy something, typically expensive, and you don't have the money for it, and don't want to put it on a credit card.

 

Examples: a big dining room set at Rooms To Go, a washer/dryer at Home Depot, a home theater system at Best Buy, a power laptop from Dell.

 

The merchant tells you that they will sell it to you at no money down, through an awesome 0% financing deal, no payments due for 18 months, say.

 

The company that agrees to provide the financing (which is not the merchant, usually) is called a Finance Company.  FICO and other makers of credit scoring systems discovered (many years ago) that consumers who have FC accounts are riskier (statistically) than those who do not.  So when FICO sees an FC account on your report, the scoring model penalizes your score, even if you were never late on it, etc.

 

ANSWER TO #2

 

The first thing to bear in mind is that when we use the word "penalized" we have to remind ourselves that this is different from a Teacher punishing us, singling one person out for something he wrote on his term paper and taking 10 points off with a big red pen.

 

FICO is not criticizing us as individuals, not judging us, not even claiming that this particular individual is likely to default on debts.  Instead, it only means that FICO's statisticians have found a "marker", an indicator common to a big group of people.  It's a claim about this big group, not about the individual creditworthiness of any individual in the group.  Nor (and this is crucial) is FICO claiming that all people in the group in question are ALL more likely to default on debts.  It's just one marker that can help predict something to some extent.

 

Many examples exist in the life and medical sciences.  If a 50 year old man has an elevated "PSA" test, that does not mean he has prostate cancer.  Nor does it mean that if he has a perfect PSA test that he doesn't have prostate cancer.  It's just that the PSA is one marker that has been somewhat helpful in diagnosing cancer across a large body of people -- but it is only one marker.

 

Let me give you one more example in the credit world.  That's CC utilization.  A person could say: hey, I always pay my credit card bills in full.  Why do I get penalized for using 12% of my credit card -- is FICO really saying that using 1/8 of my credit card makes me risky?  I just don't get it.  Maybe it was a really smart thing to buy, maybe it actually showed smart financial managment.

 

Well, that person would be right in a way.  But all FICO has to go on is these big statistical markers.  And until very recently, it could not see if you paid your bills in full.  So it had to use the best statsitical markers it had.  And its statisticians found that the class of people with a utilization of 1-9% defaulted less often than those who had 11-14% (other things being equal).  So any individual with a 12% util might be much more financially smart and responsible and much less risky than someone with a 7% utilization.  But the algorithm can't assess individuals in quite that way (though in the future it will be better at doing that).  It can only see what groups you belong to.

 

OK, so that's some broad conceptual stuff to bear in mind before we dive into the specific question about CFAs.  That preface was was important, however, because otherwise we'll have a tendency to slip into the model of a Teacher "penalizing" an individual, which is not how FICO thinks.  FICO thinks about statistical groups.

 

Given all that, the question becomes this.  Why might FICO's statisticians have found that, other things being equal, and considered only as a large statistical class, people who have consumer finance accounts tend to be riskier than those who do not?

 

Here involves speculation on my part, but it seems fairly plausible.  Consumer finance accounts are in most cases a sign of people who want to buy things that they do not have the money to pay for.  They are for people who live hand to mouth, paycheck to paycheck.  Their sales appeal is "Get this awesome dining room set at no money down and no payments due until ____."  That's a huge appeal to such people.  It gives them something for nothing -- it's the rabbit out of the magician's hat.

 

Now it is true that such people sometimes do NOT use CFAs, but rather run this sort of debt up on credit cards.  But then FICO has a way of tracking and measuring the riskiness of such people: namely via their CC utilization.

 

It is sometimes said that CFA use is a marker of sound financial management, since the person may be getting a 0% rate and can then make the cash he has in the bank "work" for him.  But this is rarely true.  If you crunch the numbers, the amount of money you make by having your money earning interest in a high-yield savings account is almost nothing.  The "0%" is a hook to induce you to spend -- the CFA almost always still costs you money (money in lost rewards cash back that you could have made with a Citidouble cash card, for example, to say nothing of the fact that you may be spending more money than you would if you paid cash).

 

So, back to this statistical group of the people who get CFAs: their typical demographic is a person who can be easily seduced into buying stuff he cannot pay for.  They are people with low amounts of safety net savings and a high tendency to live paycheck to paycheck.  Not everyone in that group is like that (any particular person on this thread is probably a happy exception) but many of them are.  People who tend to run up bills with small savings and who live paycheck to paycheck tend to have much higher risk of default -- if unexpected medical expenses occur, if they lose their job, if their engine blows on their car, they may quickly become unable to pay debts.

 

This is one reason why FICO might use the presence of CFAs on a person's report as one of many markers to compute his score.

 

(Both of my responses were taken for stuff I have written for past threads on this forum.)

Message 8 of 25
Anonymous
Not applicable

Re: Consumer Credit

As always, very helpful post from CGID above that should answer everything the OP could have possibly wanted to know.

Message 9 of 25
Anonymous
Not applicable

Re: Consumer Credit

Wow so my discount, newegg and carcare cards actually show Im riskier? maybe I should close discount then at least. it has nothing on it but i thought it would help my utilization ratio a bit. Im not sure i want to give up the others because of the 0% interest finance deals for large purchases LOL. maybe though. definitely not amazon prime. how long will they affect my score then after closing?

Message 10 of 25
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