This is a very timely article – avoid the temptation at the register this holiday season -“If you take out our credit card, you can save 20% off your order today…” and damage your credit rating! – Reeve
By Elizabeth Dwoskin | December 14, 2012 0:57 PM EST

Your obligations to credit-card companies carry
more weight on your credit report than bigger debts, such as home and
student loans.

That’s one of the findings from the Consumer Financial Protection
Bureau’s new report (PDF) on the credit scoring industry. The study
examined how Experian, Equifax,
and TransUnion calculate credit scores. To come up with scores, the
companies use information from thousands of different sources. Taken
together, the score allows lenders to assess a consumer’s likelihood of
paying back a loan, whether to offer a loan, and to calculate loan
amounts and interest rates. Besides mortgage, auto, and educational
loans, credit scores are also often a determining factor in apartment
rentals and in hiring decisions (PDF).

Credit-card companies supply most of the information that goes into
your credit report, according to the CFPB. Fifty-eight percent of the
pieces of information contained in the fine print of the average credit
report are furnished by credit-card issuers. Thirteen percent are
supplied by debt-collection agencies. Seven percent come from education
lenders, another seven from mortgage lenders, and the remaining lines
are provided by creditors that make auto loans.

Consumer Financial Protection Bureau Director Richard Cordray said
that consumers should view the findings as cause for caution.
“Especially around this holiday season,” Cordray said on a conference
call with reporters, “consumers may take out a retail credit card in
order to save 20 percent off their purchases on a given day. If they are
not responsible with that one card, it could end up costing them a lot
more down the line when they go to take out a mortgage and that credit
card is a black mark on their credit report.”

When the companies calculate a credit score, being behind on a single
mortgage payment counts against a consumer slightly more than being
behind on a single credit card, says Jeff Richardson, vice president of
public relations for VantageScore Solutions. That company develops score
formulas for the three major consumer-credit reporting companies
mentioned in the CFPB report (TransUnion and Experian referred queries
to VantageScore). If you have a credit score of 760, being 60 days late
on a credit-card payment will cause you to lose 70-90 points, the same
amount as being behind on a mortgage or car payment. If you have a high
credit score of 900, being behind on a mortgage is going to hurt your
score slightly more (100-120 points for the mortgage vs. 85-105 for the
card).

But since each late card payment counts against you separately, and
people tend to have multiple cards, the cards often carry more weight.
In other words, being behind on your credit-card payments matters more
to your credit score than your consistency in repaying bigger debts,
such as home and student loans. “Regardless of the type of account,”
says Richardson, “multiple delinquencies are always more severe than a
single delinquency. … The impact from becoming delinquent on three bank
card accounts would be similar to going delinquent on a mortgage, auto,
and credit-card account simultaneously.”

Chi Chi Wu, staff attorney with the National Consumer Law Center, a
Boston-based consumer advocacy group, says the weighting system doesn’t
always accurately measure a person’s actual creditworthiness. “If you’re
looking to refinance,” she asks, “shouldn’t the fact you pay your
mortgage on time be more relevant than whether your pay your credit-card
bills?”

The report, the first the agency has issued about credit scorers,
didn’t say companies had broken the law in their evaluations of
creditworthiness. But it did raise red flags about the accuracy of
credit scores. According to the report, regulators don’t know the extent
to which credit reports contain inaccurate information. They are
waiting on the results of a decade-long government study to find that
out. The study is expected to come out before year’s end—just as
consumers emerge from the holiday season loaded up with more debt.