How does a Consumer Finance Loan (CFL) Impact My Credit Score? – Episode #110
February 5, 2009 by VideoCreditScore-Andy
Filed under Episodes
A CFL or consumer finance loan is an installment loan used by consumers when they cannot use or chose not to use traditional means of credit. Opening a CFL does have a small negative impact on your credit score, more so than financing through traditional credit like credit cards. Why?
Consumer Finance Loans and Credit Scores
When someone opens a consumer finance loan or CFL, the research shows that they are in a more risky credit situation than someone getting traditional credit. This causes a negative hit, although a small one, to your FICO credit score. This impacts the “mixture of credit” factor of the credit score pie. On the reason code list, you can see that codes 06, 37, 47, 98, 99 all involve consumer finance loan behavior.
- 06 – Too many consumer finance accounts
- 37 – Number of consumer finance company accounts established relative to length of history.
- 47 – Number of consumer finance inquiries
- 98 – Length of time consumer finance company loans have been established
- 99 – Lack of recent consumer finance company account information
The best examples of consumer finance loans being used are at a furniture store, or an appliance store, where you pay over time.
You want to avoid these if you can. Here’s where I apply the rule that if you can’t afford to pay for furniture with cash, don’t get it. If you have to finance new furniture, you should not be getting a] something new or b] something so nice. Usually, you can find perfectly nice stuff on craigslist or at goodwill for much less. Even new items at IKEA may save you from having to use a consumer finance loan.
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“Consumer finance companies” negatively affecting your credit score is BS in my opinion. I opened a charge account with a furniture store not because I had no other options for credit (I have excellent credit) but because they were offering 0% financing for 2 years. I paid off the account before the 2 years was up and was never late on any payment. I could certainly afford the furniture, and could have paid cash but why wouldn’t I take advantage of free money for 2 years? It is ridiculous that this negatively affects my credit score. Shouldn’t payment history be a better indication?
Kristin, payment history is a better indication of risk, and thus, accounts for more of your credit score. That said, the reason consumer finance credit counts against your score is risk. It turns out that people who have them are a greater risk than people who don’t. So, it’s in the score. You are right though that if you have a really high score, why not take the advantage of free money for 2 years. The skinny is that most people mess up and then interest charges do accrue. Plus, it’s not a good idea for people with what I call “fringe” scores — where they might be close to being in a different rate class if their score drops by just 20 points.