Experts Warn: New Credit-Building Products Exploit System Unethically

The credit-reporting system is designed to provide a comprehensive view of a consumer’s financial behavior, reflecting both positive and negative aspects of their credit history. However, a new wave of credit-building products is threatening this system by only reporting favorable activities, according to Odysseas Papadimitriou, CEO of WalletHub.

Concerns Over New Credit Products

WalletHub’s recent study highlights that many new credit-building products employ questionable tactics that could undermine the integrity of credit reporting. The study reviewed 22 popular products, noting that some act as debit cards pretending to be credit cards, while others selectively report only positive information. These products range in cost from free to over $100 annually.

Papadimitriou warned that such tactics can lead consumers into unsustainable financial situations by inflating their credit scores artificially. Since credit scores depend on accurate credit files, these products pose risks to both consumers and lenders.

Impact on Credit Reports

The study found that 23% of major credit-building services do not report negative information, and 18% either misrepresent negative data or allow it to be manipulated. Some products let users choose whether negative actions are reported, creating a misleading sense of security about their creditworthiness. Additionally, 27% of products distort credit utilization by reporting inflated credit limits.

Importance of Accurate Credit Reporting

Blake Gray, an assistant professor at Kansas State University, emphasized that credit reports should reflect a person’s true financial behavior to allow lenders to assess repayment risk accurately. Any manipulation of this data undermines the reliability of credit assessments.

Credit Scoring and Reporting

Under the Equal Credit Opportunity Act, credit bureaus must accept information from creditors but are not obligated to use all of it. This can lead to discrepancies in how credit scores are calculated. Adam Rust from the Consumer Federation of America noted that credit scoring models may use selective data to predict creditworthiness.

Industry Responses

The Consumer Financial Protection Bureau declined to comment on these practices. Experian defended its Experian Boost program, asserting that adding positive information does not inflate credit scores artificially, as negative information is still factored into scoring. TransUnion and Equifax did not respond to requests for comment.

Building Credit the Right Way

Papadimitriou advised that consumers looking to build credit should consider a no-annual-fee secured credit card. By using and paying off the card regularly, consumers can demonstrate responsible credit behavior without relying on misleading credit-building products.