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Survey: Consumers are getting smarter about credit scores

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Baffled by your credit scores? You're not alone. The majority of consumers still get confused by what actually goes into a credit score, according to a May 2012 survey by the nonprofit association Consumer Federation of America (CFA) and credit score provider VantageScore Solutions.

However, the number of people who know next to nothing about credit scoring has also declined significantly in the last year, according to the second annual "Survey of Consumer Knowledge About Credit Scores." Experts say the sour economy and broader education efforts have prompted consumers to learn more about their scores.

"The economic downturn of the past couple years has made people become more financially savvy," says Anthony Sprauve, director of communications for myFICO.com. It has forced many consumers to learn more about their credit -- particularly if they were denied a loan because of it -- and it has showed them that they can't just assume things will work themselves out.

Consumers are getting smarter about credit scores

"Credit scores have been a bit of a black hole up until fairly recently because a lot of people felt that the score was handed down from some mysterious body up on high," says Sprauve. They often "didn't understand that the score was a reflection of their own behavior."

Consumers know more about their scores
People's overall knowledge about credit scoring has improved substantially since the first survey in 2011. For example, more consumers understand that they have multiple credit scores, not just one. And a larger number of consumers now realize that different types of service providers, including lenders, landlords, insurers and cellhone companies, use these scores to make decisions about potential clients.

In addition, researchers found:

  • Consumers have a better idea of what makes up a good credit score and what they can do to improve it.
  • A larger number of consumers realize that credit reports aren't always accurate and need to be checked regularly for errors.
  • A clear majority of consumers know that they are entitled to a free copy of their score if they are turned down for a loan, if they apply for a mortgage or if they are approved for a loan but the terms of the loan are not the best available.

"In the numerous consumer knowledge surveys we have undertaken over the past several decades, I have never seen such improvement from one year to the next," said Stephen Brobeck, executive director of Consumer Federation of America, in a statement.

Brobeck speculates that increased media scrutiny may be due to regulations issued in 2011 requiring lenders to send some consumers a free copy of their score, as well as heightened consumer education efforts, may have helped increase consumer awareness. It's also likely that the lingering effects of the recession prompted more consumers to take a fresh look at their scores, said Brobeck in a press conference on Monday. 

After the recession, a financial silver lining
It's no surprise that people are getting smarter about their credit scores, say experts. "When you're in a tight credit market, people pay more attention to the criteria for loan approval," says Karen Carlson, director of education for the credit counseling agency In Charge Debt Solutions.

That's especially true when people have already experienced financial hardship and are trying to get back on their feet, she says. "Negative financial events really shine a spotlight on your credit history," says Carlson. "The first question anybody asks themselves after they go through a foreclosure is, 'When will I qualify for a car loan?' or 'When will I be able to buy a home?'"

People are also realizing that they can't just wait until the last minute to start thinking seriously about their scores, adds FICO's Spruave. "People historically didn't think about their credit score until they were in the middle of some major transaction," he says. However, the weak economy and tighter access to credit has made that harder to pull off.

Costly misunderstandings remain
Despite the significant improvements in consumers' knowledge of credit scores, however, an alarming number still get tripped up by costly myths, say researchers.

For example, 51 percent of consumers still think credit repair companies are "always" or "usually" effective in helping consumers fix mistakes on their credit report or improve their scores. However, "experts agree that these companies often overpromise, charge high prices and perform services that consumers often can do themselves," said Brobeck in a press conference.

The survey also found:

  • More than half of consumers incorrectly assume age and marital status are factored into a credit score.
  • Nearly three quarters of consumers don't understand how much interest a low score can cost them.
  • More than half of consumers are confused by what credit scores measure. For example, they incorrectly assume a credit score is measuring the amount of debt they have or their financial assets, rather than the amount of risk they represent to a lender.

Consumers also tend to underestimate the potential impact of taking out large amounts of debt, such as student loans, said Barrett Burns, President and CEO of VantageScore Solutions in a press conference. "The shame of this is that as students are acquiring debt, there isn't a requirement that tells them how much their payments are going to be as they keep adding on debt," he said. Then, "when they become overwhelmed or get behind, then it slams the credit score hard."  

The good news is that despite the soft economy and more difficult credit market, most people have managed to keep their credit scores from cratering beneath them, says FICO's Sprauve. "That's been a surprise. The perception has been that because we've been through a rough patch, you would see credit scores dropping and that's not happening," he says. "The median FICO credit score in the United States is 711 and that's as of October of 2011 and it's stayed roughly in that range, going up or down a point, for the last five years."

Knowledge is power, say experts
That said, if you're still feeling iffy about your own credit score and want to improve it, you can start by learning more about your credit, say experts.

"The important thing for consumers to understand is knowledge is power," says Sprauve. "Like anything, whether it's weight loss or exercise, a good credit score requires some discipline, some sacrifice, some self-control." 

Sprauve recommends that you first order a copy of each of your credit reports from each of the big three credit bureaus (Experian, Equifax and TransUnion) and check to make sure there aren't inaccuracies hiding in the report. (You can download a free copy of each of your reports once a year at AnnualCreditReport.com.) 

Then compare your score with what's in your report. To find out your FICO credit score, you'll have to pay about $20 for it at myFICO.com.You can also purchase a copy of your VantageScore, which was developed jointly by the big three credit bureaus, from Experian.com for $7.95. "If there's a big change in your score, that could signal that there's something going on with your credit report if your behavior hasn't changed," says Sprauve. 

It's also a good idea to take a deep breath and try not to get too worked up over minor changes in your scores, says Jennifer Wallis, vice president of the Consumer Credit Counseling Service of Central Oklahoma.

"People seem to be taking a more active role in managing their credit, which is fantastic," she says. However, "they need to realize that their credit score is a snapshot of what was occurring at that point in time, so it's important not to get too hung up on the actual number. I have had clients demand to know why their score is only 845 when they feel it should be 850." (FICO scores range from a low of 300 to the high of 850.)

Rather than get worked up over a handful of points, shoot for a range and then relax, she says. "Scores will change a bit as balances change. Instead of getting upset when your score changes by a few points, focus on the bigger picture."

See related: Infographic: Post-recession shifts in credit scores, 6 surprising things that won't hurt your credit score, The truth about 7 common credit report myths

Published: May 24, 2012


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