Consumers lack basic credit score knowledge, survey shows
Two of every three Americans believe -- incorrectly -- that a consumer's age is a factor used in calculating a credit score, according to a new survey.
Source: VantageScore Solutions and the Consumer Federation of America
That's just one of several misconceptions uncovered in a survey jointly released Monday by the Consumer Federation of America (CFA) and credit score company VantageScore Solutions. The survey results show that for many borrowers, even the most basic elements of credit scores -- which predict the likelihood a borrower will repay their loans -- remain a mystery. Although the economic downturn spurred many U.S. consumers to become more knowledgeable about their personal finances, credit scores remain a costly source of confusion.
"Consumers need to know what their score is used for, what goes into it and how to improve it so that they can avoid the costly effects of a poor credit score," Barrett Burns, president and chief executive of VantageScore, said in a teleconference accompanying the announcement.
Credit scores are a numerical rating based on the information listed in a borrower's credit report. The scores are important to borrowers because of the way they are used in lending and other business decisions. Banks, for example, consider these scores when choosing whether to lend borrowers money and at what interest rate. VantageScore, the company involved in creating the survey, was established in 2006 as a joint venture by the three major U.S. credit bureaus and while it's score is gaining popularity, VantageScore remains less frequently used than the dominant U.S. credit score, known as the FICO score.
The CFA said it has conducted its survey six times over the past eight years, but the 2011 survey in conjunction with VantageScore is the most comprehensive to date. To administer this year's survey, questions developed by CFA and VantageScore were posed to a representative sample of more than 1,000 U.S. adults between Jan. 28 and 31, 2011.
Among the survey's findings, the results show that many consumers still lack some key knowledge about credit scores:
- Less than half (48 percent) of respondents correctly indicated that a credit score mainly represents the risk of not repaying a loan.
- Only 33 percent correctly indicated that age is NOT a factor used in determining credit scores, while just 40 percent knew that marital status isn't a factor.
- Only 30 percent knew that on a $20,000, 60-month auto loan, a bad credit score (FICO 580) would usually cost the borrower $5,000 more in interest payments than having a good credit score (FICO 700).
- Less than half (46 percent) knew that credit repair companies are usually not helpful, the survey said, since "those businesses typically overpromise, charge high prices and perform services that consumers could do themselves."
U.S. consumers clearly need more education, experts say. "It doesn't surprise me that when we totaled up the scores, Americans only scored a 60, which if you're in school is a low passing grade," CFA Executive Director Stephen Brobeck said in the conference call.
School of credit scoring
So who's at the head of the class? According to the survey, middle-aged consumers (34 to 45) and wealthy consumers (annual household incomes of $100,000 and above) know the most about credit scores, with those groups correctly answering 67 percent and 66 percent of the survey questions, respectively. "Better income people tend to be better educated and are more likely to have access to the Internet, which is where a lot of this information comes from," says Sandy Shore, counseling supervisor with nonprofit credit counseling agency Novadebt.
Meanwhile, elderly consumers (at least 65 years old) and low-income consumers (incomes below $25,000) know the least about credit scores, the survey said. Just 53 percent and 58 percent of those respective groups correctly answered the survey questions. That's not surprising, some experts say, given that consumers only gained access to their credit scores during the past decade and that these groups that are likely to have less access to and interest in the Internet.
But the survey results weren't all bad. The vast majority of respondents:
- Correctly identified the factors used to calculate credit scores, including missed payments (93 percent), high credit card balances (88 percent) and multiple credit applications at the same time (81 percent).
- Were widely aware that mortgage lenders (86 percent) and credit card issuers (85 percent) use credit scores to make lending decisions about whether to extend credit and at what price.
- Knew that the three main steps to improving or maintaining a credit score are making on-time loan payments, maintaining credit card balances under 25 percent of the card's credit limit and not opening several credit card accounts simultaneously. About 70 percent of respondents got these points correct.
That may be enough information for many consumers. "I'm not sure they need to know every last gnarly detail," says Linda Sherry, director of national priorities with advocacy group Consumer Action. "What consumers do need to know that it is important to pay your loans/credit extensions back on time and to not take out more credit than you can afford to comfortably repay -- regardless of what companies are willing to hand out," she says in an e-mail.
Nevertheless, experts say that spending a little time learning about credit scores can offer significant benefits. "People will spend 10 minutes looking at two ketchup bottles deciding what is a better buy but they won't spend 10 minutes educating themselves about credit," says Novadebt's Shore. "You may save 10 cents at the supermarket, but there's a potential to save hundreds or thousands of dollars by looking at your credit."
See related: The components of a FICO credit score, The good guys of credit repair
Published: February 28, 2011