Quite a few people today don’t fully understand credit ratings

Consumers’ understanding of credit ratings eroded during the last year, as reported by the seventh annual credit score survey, released by the Consumer Federation of America (CFA) and VantageScore Solutions, LLC.

For instance, fewer people knew that credit ratings can be used by companies that aren’t in the money-lending business. For cell phone companies, this awareness was down from 68% to 59%; for electric utilities, this awareness was down from 53% to 44%.

Quite a few people today don’t fully understand credit ratings

Given that the margin of error for a national survey of 1,000 representative adult Americans is plus or minus three percentage points, the declines are too large to reflect sampling bias.

Simultaneously, the percentage of individuals who said they obtained a minimum of one credit score in the past year rose steadily – from 49% in 2014, to 51% in 2015, 54% in 2016 and 56% in 2017.

“One would think that increasing access to one’s credit scores would help increase knowledge about these scores,” says Stephen Brobeck, CFA’s Executive Director. “But that apparently has not been the case, to the detriment of consumers. Low credit scores can cost consumers hundreds and sometimes thousands of dollars a year in higher loan and service costs.”

“The greater availability of credit scores and credit reports is certainly a net positive for consumers, however the data demonstrates that we collectively have work to do to help consumers understand that credit scores are used by more than just lenders,” said Barrett Burns, president & CEO of VantageScore Solutions. “Credit scores can have an impact on everything from your loan terms to the size of the deposit required to acquire a mobile phone.”

What’s promising from the survey is that a sizable majority of consumers correctly identified important aspects influencing scores – missed loan payments (91%), high credit card balances (86%) and personal bankruptcy (85%) – and in addition two important solutions to raise their credit scores or maintain high scores – making loan payments on time (96%) and keeping credit card balances low (80%).

Other declines in consumer understanding during the last 14 months

A low credit score on a typical auto loan would increase loan charges by in excess of $5,000 (down from 25% to 18%)
Credit scores represent the risk of not repaying a loan (from 43% to 38%),
Individuals have more than one credit score (from 69% to 64%)
It’s very important to check the accuracy of one’s credit reports at the three main credit bureaus (from 73% to 68%)
Credit repair companies are never or only occasionally helpful in improving one’s credit scores (from 54% to 47%).

Men incorrectly think they understand more than women

Only 54% of female respondents, when compared to 61% of male respondents, said they considered their understanding of credit scores to be good or excellent. Yet, on a broad range of questions, women knew more:

A higher percentage of men than women incorrectly revealed that a person’s age (47% v. 41%), marital status (48% v. 38%), and ethnic origin (17% v. 13%) were among factors utilized to calculate a credit score.
A higher percentage of women (66%) than men (59%) correctly identified three actions which will help a consumer raise a low credit score or sustain a high one.
A higher percentage of women (72%) than men (64%) are aware of the significance of checking the accuracy of one’s credit reports at the three main credit bureaus. That difference may reflect, in part, the fact that a higher percentage of women (67%) than men (63%) said they had obtained a free copy of their credit reports at least once.

Higher income consumers know more

The most significant demographic difference in credit ratings knowledge reflected income. As an example, only 55% of those with household incomes under $25,000 correctly identified three ways to improve a low credit score as compared to 73% of those in households with incomes $100,000 and over.

“Certainly one reason for the knowledge gap is that low-income consumers have much less experience with credit than do high-income consumers,” says Brobeck. “Yet, understanding credit scores is absolutely essential to lower-income consumers who can ill-afford to pay high loan rates and service fees.”

How consumers can raise credit ratings

Consistently make loan payments when they’re due each and every month. A late payment can lower a credit scores by dozens of points
Use only a small percentage of credit available on a credit card
Pay down credit card debt as opposed to shift it to a different credit card or home equity loan
Regularly check credit reports to ensure they’re error-free. Which can be done by contacting annualcreditreport.com or calling (800) 322-8228.

To help consumers better understand credit scores, CFA and VantageScore maintain an interactive credit score quiz website, CreditScoreQuiz.org, which enables consumers to test their credit score knowledge by answering 12 questions. Additionally it is offered in Spanish.

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