Survey: Consumers still don't understand credit scores

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Two years after new federal regulations gave credit card customers and other Americans wider access to their credit scores, many consumers still harbor fundamental and costly misunderstandings about this vital measurement of their creditworthiness, according to a survey released Monday.

The report from the Consumer Federation of America and VantageScore Solutions, a credit score provider, found that about 40 percent of Americans still do not know that credit card companies and mortgage lenders use credit scores to help determine if applicants are eligible for credit and what the interest rate will be.

About the same percentage of consumers erroneously believes that age and marital status are part of the formula that determines their credit scores.

Other widespread misconceptions involve awareness of when -- or even if -- consumers are entitled to obtain their credit scores without cost, how best to improve a credit score, the potential consequences associated with missing a student loan payment, and the relatively benign credit score penalties for -- and potentially huge financial benefits of -- shopping around for the best interest rates.

Some knowledge gains
At the same time, however, the third annual " Survey of Consumer Knowledge About Credit Scores " found that consumers are slowly gaining more knowledge about credit scores. It also found that women were more knowledgeable than men when it came to how credit scores are assembled and deployed -- and, importantly, they were more likely to know how to obtain and monitor their credit scores.

Ninety-four percent of the respondents knew that making loan payments on time helps raise credit scores. In addition, 71 percent now know that consumers have more than one generic credit score.

Such knowledge is a crucial element of any consumer's financial knowledge base. Credit card companies and other lenders use credit scores as a key factor in determining whether you will get credit, how much you will get, and what your interest rate will be.

"Our findings are complex, but clearly identify a tough challenge facing us and other financial educators," said Stephen Brobeck, executive director of Consumer Federation of America, which represents nearly 300 consumer organizations around the country. "Significant minorities of the population appear to know very little about credit scores."

Long a subject of mystery and intrigue, credit scores are becoming increasingly available to consumers, even if many people are not aware of that. Now, virtually anyone can purchase a report that shows one or more of the several scores assigned to virtually every borrower.

In addition, rules issued in 2011 by federal banking regulators require lenders to provide a free credit score to anyone whose relatively low score resulted in an "adverse action" -- that is, the lender denied them credit or didn't give them the best terms. Bottom line: Millions of Americans now are entitled to free credit score reports every year, though only half of all Americans know it.

At the same time, issuers of credit scores and more detailed credit reports are finding new markets and affecting consumers in new ways. A 2012 survey by the Society for Human Resource Management found that, before hiring new employees, nearly half of all U.S. employers check the credit reports of some or all job applicants.

This can generate an extremely discouraging feedback loop for the unemployed: A person loses a job. That person begins to run up credit card and other debts. His or her credit score takes a hit. And this, in turn, diminishes the person's ability to land a new job.

Unfortunately, many Americans still do not know that lenders are required to inform borrowers of the credit score used in their lending decision after consumers apply for a mortgage (27 percent didn't know this), when they are turned down for a loan (24 percent), and when they don't receive the best interest rate or other terms (35 percent).

Key findings
A closer look at what else the survey uncovered:

  • Forty percent of respondents did not know that credit card issuers use credit scores when assessing an applicant and 42 percent did not know that mortgage lenders use the credit scores. "The scores were originally developed for and are used most frequently by these and other lenders," Brobeck said.
  • Only half of all Americans are fully aware of their rights to obtain free credit scores under some circumstances, and one in five Americans erroneously believe that they never can get a free copy of their credit score.
  • Women tend to be better informed about credit scores than men, and young adults of 18 to 34 are about as knowledgeable about credit scores as the rest of the adult population. Far fewer women incorrectly believed that age (38 percent compared to 48 percent of men) and marital status (34 percent versus 46 percent) are used in calculating credit scores. In addition, more women correctly knew that credit bureaus collect data for scores and can identify a good score.
  • Many people underestimate the cost of a low credit score. Only 21 percent of respondents knew that a typical five-year $20,000 auto loan would cost a borrower with a low credit score more than $5,000 more in interest than the cost paid by someone with a high credit score.
  • Only about one in five consumers knows that they can obtain their credit scores from all of these sources: The three main credit bureaus -- Experian, Equifax and TransUnion. Many individual lenders. Some independent websites.
  • Only 7 percent of Americans know that multiple inquiries within a week or two about obtaining a mortgage or car loan will not lower their credit score. This is highly disturbing to consumer advocates because it suggests that many people are needlessly restraining themselves from fully exploring their options when it comes to finding the best interest rates.
    "We encourage people to shop for the best rates," said Barrett Burns, president and chief executive officer of VantageScore Solutions. "When it comes to those types of loans, you can make 10, 15, even 20 inquiries and they're treated as one inquiry [from the standpoint of a credit score]. When you're shopping for credit of that type, it's not going to cause an alarm."
    Brobek, the consumer advocate, agreed. "Even if it had an effect on your credit score, it would be modest," he said. "But the potential gains from saving on interest would be huge."
  • Forty-three percent of American consumers erroneously believe that age affects a credit score and 40 percent believe that marital status influences the calculation. In reality, the most important factors in determining a credit score are credit card balances, whether personal bankruptcies have been filed, and missed credit card or other debt payments.

"One can have a great deal of control over one's credit scores," Brobeck said. "The most important thing a consumer can do to keep their credit score high is to simply pay their bills on time."

Survey methodology
The survey of 1,022 adult Americans was conducted between April 25 and 28, using landlines and cellphones. The margin of error was plus or minus 3 percentage points. The pollsters said the latest results could not accurately be compared to previous findings due to changes in methodology, particularly regarding the most recent survey's use of cellphones.

See related: Ten things you must know about credit scores, reports , What VantageScores are, how they work



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Personal Finance , Credit and Debt

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