September 17, 2019 / Source: CFPB

New report explores the relationship between Financial Well-Being and the contents of and engagement with credit reports

By Éva Nagypál and Jeremy Tobacman – SEP 17, 2019

Today the Consumer Financial Protection Bureau (Bureau) released an Innovation Insight report which describes a first of its kind study exploring the relationship between subjective financial well-being and objective credit report characteristics and consumers’ engagement with financial information through educational tools. “Credit Characteristics, Credit Engagement Tools, and Financial Well-Being” presents the findings of a joint research study between the Bureau and Credit Karma, a personal finance technology company providing free credit scores and reports and credit-related educational tools. This report is the first to study the relationship between financial well-being and engagement with financial information based on a survey of consumers matched with actual data on engagement.

Building on the Bureau’s previous research efforts on financial well-being, this study uses the Financial Well-Being (FWB) Scale created by the Bureau to measure consumers’ subjective financial well-being and relates the derived FWB score to objective measures of consumers’ financial health, specifically, consumers’ credit report characteristics.  The study also seeks to relate consumers’ subjective financial well-being to consumers’ engagement with financial information through educational tools, including access to a credit score simulation tool, information about credit factors, and emails with information and suggestions.

The report analyzes data from a voluntary survey that Credit Karma conducted among some of its members in the fall of 2017. The survey, which consisted of the full 10-question version of the Bureau’s FWB Scale, resulted in close to 3,000 de-identified observations on respondents’ FWB score matched with background, credit report, and website usage data, as well as engagement metrics. The report’s main findings include:

• A consumer’s credit score is very strongly positively connected to the FWB score, as indicated by a correlation coefficient of 0.44, meaning that people with higher credit scores also tend to have higher FWB scores.
• There seems to be a positive relationship between age and the FWB score, but after accounting for credit score the relationship all but disappears.
• In addition to credit score and age, the study identifies seven credit report variables and three engagement variables that are strongly related to a consumer’s FWB score.

  Credit Report Variables — Credit card limits, holding a credit card, and the number of accounts recently opened with a balance are all positively related to a consumer’s FWB score, meaning that people with these characteristics tend to also have higher FWB scores. Credit card utilization, the number of revolving accounts, the number of collections in the past two years, and having a student loan are all negatively related to a consumer’s FWB score, meaning that people with these characteristics tend to have lower FWB scores.

  Engagement with Credit Karma Platform Variables — A consumer’s FWB score relates positively to the number of times the credit simulator was used and the number of times credit factors were reviewed. Finally, FWB score relates negatively to the number of emails from Credit Karma (usually related to credit monitoring alerts) opened in the last sixty days.

The observed relationships might explain the true causes of changes in FWB score, or they might mean that changes in FWB score lead to changes in the related factor, or they might be better explained by unconsidered factors such as the propensity to plan. Either way, the results are intriguing and warrant further study of these relationships as the CFPB develops its strategy for improving financial capability using the concept of financial well-being.