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National Mortgage Professional
Jun 22, 2005

Free brochure addresses misconceptions on credit scoresmortgagepress.comcredit scores, consumer knowledge, education According to a new survey by the Consumer Federation of America (CFA) and Fair Isaac Corporation (FICO), nearly 50 percent of American consumers do not understand key facts about credit scores: •49 percent do not understand that credit scores measure credit risk; and •45 percent incorrectly think that increasing one's income will increase one's credit score. "Despite all of the news coverage about credit scores over the past year, many consumers still do not understand important facts about these increasingly influential numbers," said Stephen Brobeck, CFA executive director. To provide consumers with basic information about credit scores, CFA and FICO have prepared a new free brochure that is being distributed by the Federal Citizen Information Center (FCIC). "This credit score brochure contains the most important information about the score most businesses use--the FICO credit score--including what factors influence its rise and fall, and how consumers can get their own scores," said Cheri St. John, vice president of Global Scoring and Consumer Solutions for Fair Isaac. "The Federal Citizen Information Center is proud to work with CFA and Fair Isaac to distribute this very valuable consumer resource," said Mary Levy, FCIC director of Consumer Information and Education. "This public/private sector partnership means that more consumers will get the information they need to manage their credit, improve their credit scores and get the best possible credit terms the marketplace has to offer. It's a win-win-win situation for the consumer, the credit industry and the government." Many consumers misunderstand scores and the means to improve them The survey was conducted by Opinion Research Corporation (ORC) during Feb. 10-13. The 1,013 people surveyed by telephone are representative of the adult American population. The sampling error is plus or minus three percentage points. When given four definitions of a credit score, only 51 percent correctly indicated that it represents "someone's credit risk." Forty-nine percent said that it represents credit availability, debt levels or credit IQ, or that they did not know what it represents. Respondents who were most knowledgeable about the definition of credit scores were those with incomes over $75,000 (66 percent), those with a college degree (63 percent), and those 35-44 years of age (62 percent). Those with the least knowledge of this definition were those with incomes under $25,000 (34 percent), those without a high school degree (35 percent), and those 18-24 years of age (34 percent). When asked what actions would improve a person's credit score, nearly everyone (93 percent) correctly said that "paying off one's debts" would do so. But nearly one-half also incorrectly said that "getting a job that pays a lot more" (45 percent) and "inheriting $1 million" (40 percent) would also directly raise one's credit score. Again, those with the least knowledge about what will raise a credit score were the young, the least affluent and the least educated. For example, 67 percent of those aged 18-24 incorrectly believe that increasing one's income raises one's score. Sixty-two percent of those who have not completed high school and 57 percent of those with incomes under $25,000 also incorrectly believe that higher incomes raise credit scores. Free brochure explains management of scores CFA and Fair Isaac have prepared a brochure--"Your Credit Scores"--that is available free from the FCIC Center or online at the FCIC, CFA and Fair Isaac Web sites. Key information in the brochure includes the following: •Many kinds of businesses use credit scores today including: telephone companies, electricity and natural gas service providers, apartment landlords, and of course, banks, mortgage lenders, credit card companies and auto lenders. •FICO credit scores range from 300-850, and a score above 700 indicates relatively low credit risk, while scores below 600 indicate relatively high risk, which could make it harder to get credit or lead to higher loan rates. •The difference between a 580 and a 720 FICO credit score could mean a three percentage point difference in a mortgage rate. That would represent a $72,000 difference in mortgage loan costs over the lifetime of a 30-year, $100,000 fixed-rate loan. •Your payment history affects about 35 percent of a FICO credit score; how much you owe30 percent; the length of your credit history15 percent; and applying for new credit10 percent. •You can raise your credit score by paying bills on time, keeping balances low on credit cards, paying off debt rather than moving it between credit cards, and taking other measures outlined in the brochure. A unique feature of the brochure is a group of examples of how two different consumers use credit, and how their use influences their FICO credit scores over time. For example, when one consumer runs up two credit cards to nearly their limit, his ex-wife's credit score declines by 80 points since her name is still on both card accounts. When another consumer makes steady payments for a year on credit cards, significantly lowering balances, her credit score rises by 50 points. Organizations that provide credit scores are listed along with information about other kinds of risk scores, Web and phone access, and related prices. For more information, visit www.pueblo.gsa.gov, www.myfico.com or www.consumerfed.org.
Published
Jun 22, 2005
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