Consumers score low on credit survey mortgagepress.comcredit scores, consumer education, credit reporting
As companies and organizations increasingly utilize credit
scores to evaluate individuals as prospective customers, employees
or tenants, it is essential that consumers know their credit score,
understand what it means, and learn how to raise it. But according
to a new survey developed by the Consumer Federation of America
(CFA) and Providian Financial, most Americans do not understand
credit scores even when they think their knowledge of credit is
good.
Most consumers do not understand what credit scores measure,
what good and bad scores are, and how scores can be improved,
according to the survey of 1,027 representative adult Americans,
administered by the Opinion Research Corporation International for
CFA and Providian in late July. A follow-up survey will be
conducted in 2005.
Most consumers surveyed correctly understand that lenders use
credit scores, but only a minority know that electric utilities (30
percent), home insurers (47 percent) and landlords (48 percent)
often use credit scores to decide whether to sell a service and at
what price. The survey's good news is that most consumers (59
percent) recognize that their knowledge of credit scores is poor or
fair and, therefore, are more likely to seek this knowledge once
they understand how important their credit scores are to their
lives.
For example, according to Fair Isaac's Web site, on a $150,000,
30-year, fixed-rate mortgage, consumers with credit scores higher
than 720 will be charged a 5.72 percent rate with monthly payments
of $872, while consumers with credit scores below 560 will be
charged a 9.29 percent rate with monthly payments of $1,238 (if in
fact they are able to qualify for the loan)an annual difference of
$4,392.
Most consumers do not understand credit
scores
Most consumers do not understand the meaning of credit scores,
their importance, how to obtain them, and how to improve them,
according to the CFA/Providian survey (with a margin of error of
plus or minus three percentage points).
•Only about one-third (34 percent) correctly understand
that credit scores indicate the risk of not repaying a loan, not
factors like financial resources to pay back loans or knowledge of
consumer credit. This low percentage appears to reflect the
misconception that credit scores evaluate factors like income (65
percent), age (38 percent) and marital status (37 percent) rather
than one's credit history.
•More than one-half (52 percent) incorrectly believe that a
married couple has a combined credit score. And, more than
two-fifths (43 percent) incorrectly believe that individuals have
only one score. In fact, each of the three major credit
bureausTransUnion, Experian and Equifaxcomputes separate scores
that usually differ.
•Few consumers know what constitutes a good score. Only 12
percent correctly identified the low 600s as the level below which
they would be denied credit or have to pay a higher, sub-prime
rate. (One-third thought this level was the low 500s, and 30
percent said they didn't know.) And, only 13 percent correctly
understand that scores above the low 700s usually qualify them for
the lowest rates.
•Many consumers do not have a clear idea how to improve their
credit score. Two-fifths (40 percent) don't understand that paying
off a large balance on a credit card will improve one's credit
score. And, more than one-quarter (28 percent) believe incorrectly
that using a credit card's full credit line will improve one's
score.
•Moreover, many who try to learn their credit score in the
future will be surprised to learn that there is often a charge.
Nearly three-quarters (72 percent) incorrectly believe that they
can obtain their credit score for free once a year. (That right was
recently established for free access to one's credit report but not
for free access to one's score except when applying for a mortgage
loan.)
Those with the most to lose know the
least
In general, those who consider their knowledge of credit scores to
be low in fact know the least about these scores. Those who say
their knowledge is "poor" are more likely, when asked knowledge
questions, to say they "don't know" or answer these questions
incorrectly. But what is surprising is that those who think their
knowledge is "excellent" frequently answer knowledge questions
incorrectly.
For example, of those who said their knowledge was excellent,
only 41 percent understand that a credit score measures risk, only
45 percent know that Tenneco is not a credit bureau, and 56 percent
incorrectly believe a married couple has a combined credit score.
Moreover, those who consider their knowledge "excellent" do not
know any more than those who consider their knowledge to be only
"fair."
Those with the lowest incomes and least education know the least
about credit scores. For example, of those with incomes below
$25,000, only 16 percent understand that a score measures credit
risk, only 24 percent know that Tenneco is not a credit bureau, and
62 percent incorrectly believe a married couple has a combined
credit score.
This lack of knowledge about credit scores exists despite the
fact that those who have had credit card payment difficulties know
more about these scores than those who have not had such problems,
and, not surprisingly, credit cardholders with the lowest incomes
have had the most payment difficulties. Also, those who have
obtained their scores (53 percent, though fewer than half of these
in the past year) know more about credit scores than those who have
not. These two findings suggest that consumers tend to learn about
credit scores through their credit experiences.
Five critical facts about credit scores
CFA and Providian believe that all consumers should know five
important facts about credit scores:
•Scores reflect only one's own past credit history, not
personal characteristics such as age and gender. Over time,
consumers have the ability to control these scores.
•A low score could not only cost you up to thousands of
dollars a year in additional finance charges, but also deny you
access to credit, insurance, electric and telephone service, a
rental unit and even a job.
•Consumers with scores below 600 are typically charged
relatively high, sub-prime loan rates, while those with scores
above 700 are usually charged relatively low rates, and those with
scores above 760 are charged the lowest rates.
•The most effective steps one can take to improve one's score
are to: Pay your bills consistently and on time (If you have missed
payments, get current and stay current.); don't max-out your credit
cards or other "revolving credit; pay off debt rather than move it
around; and don't open many new accounts rapidly. Finally, check
your credit report to make sure it is error-free.
•You can purchase your credit scores (and reports) from all
three credit bureaus by contacting Fair Isaac (www.myFICO.com), or individual
reports and scores from the three bureaus: TransUnion (www.transunion.com), Experian
(www.experian.com) and
Equifax (www.equifax.com). Or,
one can receive a TransUnion-derived credit score monthly for free
if you hold a Providian credit card. (After Wednesday, Dec. 1,
mortgage applicants can obtain their score for free from the
lender.)
For more information, visit www.consumerfed.org or www.providian.com.
