Borrowell, Canada’s leading credit education and financial product recommendation platform, found a correlation between credit score monitoring and credit score improvement over time in a previous study. But we dug deeper into the data and discovered a relationship between credit monitoring and positive change relating to good credit behaviour.
Our findings indicate that a higher frequency of credit monitoring was related to lower delinquency rates and late payments over time. Similarly, more frequent credit monitoring was also related to lower credit utilization.
Study findings suggest a positive relationship between credit monitoring and credit score increase
Borrowell members receive their free Equifax credit score and credit report on a weekly basis. To measure member engagement in credit monitoring, we calculated the percent of logins upon credit score refresh for each member.
To examine the relationship between credit monitoring and credit score changes, we calculated the difference between a member’s first credit score upon signing up for Borrowell and their most recent credit score.
Across all members examined, we found a positive relationship between the frequency of credit monitoring and credit score increases. For the most engaged members, we found that credit scores increased by an average of 18 points.
In the next analysis, we restricted our sample to members with initial credit scores below the median of the credit score distribution. For this subsample, we found that nearly all members tended to increase their scores over time. This is intuitive because members with lower initial scores should, on average, trend up over time. However, in this subsample, we found that credit monitoring showed an even stronger relationship with credit score increases. While the least engaged members in this subsample tended to increase their scores by 5 points, the most engaged members increased their scores by over 30 points.
Figure 1. Average credit score change plotted as a function of credit monitoring frequency (% Login Upon Score Refresh). Points represent group averages of members grouped into 19 equally-spaced bins. Lines represent the linear trend. Data in dark blue represents all members examined. Data in light purple represents a subsample of members with initial credit scores below the median of the credit score distribution.
There is a strong correlation between credit monitoring and good credit behaviour
We’ve established the positive impact of credit monitoring on an individual’s credit score and investigated how the relationship works. We also hypothesized that credit monitoring would be related to a positive change in a member’s credit behaviour, which would then drive an increase in their credit scores over time.
We measured improvements in credit behaviour as a decrease in the number of delinquencies and late payments between a member’s initial credit report upon signing up for Borrowell and their most recent credit report. We also examined the change in the number of collections between members’ first and last report. Our results indicate that there is a correlation between credit monitoring and a positive change in credit behaviour. This was demonstrated in a few different ways.
Payment history (paying bills on time) makes up 35% of your credit score. Our study found that a higher frequency of credit monitoring was related to lower delinquency rates and late payments over time.
Similar to the above findings, more frequent credit monitoring was also related to lower rates of collections. Collections and bankruptcies severely affect credit scores. Equifax, the credit bureau that calculates credit scores that Borrowell pulls from, doesn’t provide concrete information as to how much these items affect one’s score. But we can infer from existing data it’s detrimental to having good credit health.
Figure 2. Average change in late payments and collections plotted as a function of credit monitoring frequency (% Login Upon Score Refresh). Points represent group averages of members grouped into 19 equally-spaced bins. Lines represent the linear trend.
We also asked about other behaviours that are related to credit score improvements and good credit behaviour. Credit utilization is the amount of credit an individual has used out of the total amount available to them. The lower their credit utilization is, the better. Given that credit utilization comprises 30% of a member’s credit score, we hypothesized that members who improve their score over time also learn to better manage their credit utilization.
Our results supported this hypothesis, such that members who increased their scores over time also tended to decrease their credit utilization. This supports the idea that paying down revolving credit card debts over time can correspond to a strong benefit to one’s credit score.
A low-interest personal loan from Borrowell can be used to consolidate high-interest revolving debt. Borrowell customers, on average, save $4,812,* compared to borrowing against a credit card.
Figure 3. Average change in credit utilization plotted against the average change in credit score. Change in both measures is the difference between the first credit report upon Borrowell signup and the most recent credit report. Points represent group averages of members grouped into 12 equally-spaced bins. Lines represent the linear trend.
Are these findings consistent with other research?
Yes, these findings are consistent with other research. Specifically, the study: “Does Knowing Your FICO Score Change Financial Behavior? Evidence From A Field Experiment With Student Loan Borrowers,” by Tatiana Homono Rourke O’Brien and Abigail B. Sussman, published in September 2018.
The study followed over 400,000 American student loan borrowers across a two-year period. The participants in this study were randomly assigned to one of two groups: the control group or the treatment group. The treatment group received quarterly updates on their FICO Score, a personalized metric of creditworthiness. The control group received no communication.
The results showed that FICO score monitoring in the treatment group led to a reduction in the likelihood of having past due accounts. This improvement also contributed to a significant increase in credit scores. Survey data on a subsample of borrowers showed that treatment group members were less likely to overestimate their own FICO Score, indicating the intervention may correct for overoptimism. These changes in behaviour were also sustained over the two-year duration of the study.
For us, this was the most interesting part. People typically overestimate their credit score because they’ve never checked it and they’re unsure about what makes up their score. If an individual is in the market for a financial product, such as a mortgage, it’s best for them to monitor their score beforehand to ensure they secure the best possible rate. Being a Borrowell member, there’s no need to stay in the dark and estimate what their credit score is.
Why is it important to have a good credit score?
A good credit score is important because it can help people save money over time and improve their overall financial well-being. A good to excellent credit score may also help one get the most competitive mortgage and insurance rates and may secure lower interest rates on a personal loan.
These new findings suggest a correlation between the frequency of credit monitoring and a decrease in collections, delinquencies, and high credit utilization ratio. What’s exciting for us is that we’re living our mission: we’re helping Canadians make great decisions about credit by increased transparency and awareness in the credit industry.
Based on credit card APR of 19.9% and credit card debt repayment of $250 per month.
Homonoff, Tatiana and OBrien, Rourke and Sussman, Abigail B., Does Knowing Your FICO Score Change Financial Behavior? Evidence from a Field Experiment with Student Loan Borrowers (September 11, 2018). NYU Wagner Research Paper. Available at SSRN: https://ssrn.com/abstract=3129075 or http://dx.doi.org/10.2139/ssrn.3129075