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
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
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
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
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
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
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).
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
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."
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.
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