New credit-building products are gaming the system in a bad way, experts say

The credit-reporting system is built on the idea that credit reports give businesses and potential lenders a real-time and accurate look at a consumer’s creditworthiness. 

That includes the good and the bad records of the consumer’s financial behavior, reporting on-time account payments as well as bills that are missed or late. 

But a new crop of credit-building products designed to only report positive activity is a threat to the credit reporting system, said Odysseas Papadimitriou, CEO of personal finance website WalletHub. 

New products game the credit-reporting system

WalletHub published a study recently on the new products, saying many of them “rely on shady tactics that may end up doing a disservice to users and threatening the credit system more broadly.” 

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The study said it “evaluated 22 of the most popular credit building products available right now, given that some of them are just debit cards masquerading as credit cards while others only send positive information to your credit report.” The products evaluated range from no cost to $100 or more a year.

“When consumers are getting access to credit that they should not be getting by gaming the system, then you’re pushing consumers to an unsustainable financial situation,” Papadimitriou told USA TODAY in an interview. 

Since credit scores are largely based on credit files, an artificial boost hurts both consumers and lenders, he said. 

 Consumers are helped when they can be placed in sustainable debt for sustainable spending, he said.  

“You don’t help people by pushing them over the edge,” he said. 

While the entire lending system is hurt by getting a false assessment of a consumer’s creditworthiness, Papadimitriou said, the biggest potential losers are the small creditors like landlords, who rely on a credit score to make decisions about renters and their ability to pay the rent, he said. 

Here are some key findings from the WalletHub study:

• 27% of the credit-building products examined do not provide an actual loan or line of credit that gives customers access to usable funds.

• 23% of major credit-building services do not report negative information to the credit bureaus, while 18% report negative information but allow it to be gamed. Some products let the consumer decide whether a negative action will be reported. "While this might initially appear beneficial to consumers, it ultimately proves detrimental in the long run as it creates a false sense of security, leading consumers to believe their credit is better than it actually is," the study said.  

• 27% of major credit-building products improve the user’s credit utilization rate by reporting false information, such as sharing an inflated credit limit.   

Why is an accurate credit report important?

The purpose of credit is to allow a stranger to evaluate another stranger’s likelihood of repaying a loan on time and in full, said Blake Gray, an assistant professor of personal financial planning at Kansas State University. 

The credit report is supposed to be the information that vouches for that person’s character, behaviors, and probable future action, Gray said in an interview with USA TODAY. 

“It is like knowing someone who really knows the person and can detail their dealings with them. The problem is that you can have biased friends who select what they do and do not tell you,” he said. 

Gray said he shares the concern about some gaming the reporting system. 

“To protect consumers we need to ensure accurate and complete information is shared with the reporting agencies, even if it is reflected with lower credit scores for those who have made mistakes,” he said. 

What is a credit score and why is it important?

Under the federal Equal Credit Opportunity Act, credit reporting agencies or bureaus are required to accept information from creditors about consumers' credit and payment behavior, but are not required to use it, said Adam Rust, director of financial services for the Consumer Federation of America.

The information in each of the credit reports from the three main credit reporting agencies can be used to calculate credit scores. Most of the agencies have their own credit scoring model and FICO is the most widely-used. Then creditors use the score to make a decision about a consumer's likelihood of paying their bills on time.

But the credit scorers aren't always using all of the information in the credit reports for their calculations, said Rust.

"They're using the information they want to use," he said. "It's all about making the most accurate prediction and using data that they feel they can cover the most people with."

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Responses from the industry

Gray and Papadimitriou also questioned whether the Consumer Financial Protection Bureau, which oversees the Fair Credit Reporting Act, had any concerns about the new practice of only reporting positive credit.

They had similar questions about Experian, one of the credit reporting agencies, which has a division that allows payments for rent, utilities and other services not typically reported to credit agencies to count towards building a positive credit profile.

In an email to USA TODAY, the Consumer Financial Protection Bureau declined to comment. 

Experian defended its Experian Boost program, in an emailed statement.

“At Experian we believe it is our role to expand financial inclusion to more consumers, with everyone having access to financial opportunities and control over their financial future, regardless of breadth of credit history. Lenders have long sought new ways to identify creditworthy consumers, and Experian Boost works with existing credit scores, which have traditionally factored in more payment types than are reported to credit bureaus,” Experian said, adding that it helps lenders make more informed decisions with a complete picture. 

But Experian said adding positive information doesn’t inflate someone’s credit score.

"Since the credit scoring system already takes into consideration late payments, if negative information is already impacting one’s credit score, adding positive information is not going to give someone with a bad credit history a good one,'' it said. "Building credit debt-free through Experian Boost is a good step in improving financial inclusion and achieving financial power for all.” 

The nation’s other two main credit reporting agencies, TransUnion and Equifax, did not respond to a request from USA TODAY for comment about the WalletHub study or the impact of positive-only data on credit reports and scores. 

What's the right way to build your credit?

The best way for a consumer to build up credit if they don't qualify for a traditional credit card, is to get a no-annual fee secure credit card, said Papadimitriou.

"Then each month, you demonstrate that 'Hey, I went to the supermarket, I went to a restaurant, I spent $100 and I'm going to make sure at the end of the month when the bill comes, I have $100 to pay off those expenses,' " he said.

Those baby steps can then lead to moving on and handling more credit, he said.

Betty Lin-Fisher is a consumer reporter for USA TODAY. Reach her at [email protected] or follow her on X, Facebook or Instagram @blinfisher. Sign up for our free The Daily Money newsletter, which will include consumer news on Fridays,here.