Many consumers don’t understand credit scores

NEW YORK – June 30, 2017 – Consumers’ knowledge of credit scores eroded over the past year, according to the seventh annual credit score survey, released by the Consumer Federation of America (CFA) and VantageScore Solutions, LLC.

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

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.

At the same time, the percentage of people who said they obtained at least one credit score in the past year rose steadily – from 49 percent in 2014, to 51 percent in 2015, 54 percent in 2016 and 56 percent 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.”

The good news from the survey is that a large majority of consumers correctly identified key factors influencing scores – missed loan payments (91%), high credit card balances (86%) and personal bankruptcy (85%) – and also two important ways 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 over the past 14 months

A low credit score on a typical auto loan would increase loan charges by more than $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 know more than women

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

A higher percentage of men than women incorrectly indicated that a person’s age (47% v. 41%), marital status (48% v. 38%), and ethnic origin (17% v. 13%) were among factors used to calculate a credit score.
A higher percentage of women (66%) than men (59%) correctly identified three actions that help a consumer raise a low credit score or maintain a high one.
A higher percentage of women (72%) than men (64%) understand the importance 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 largest demographic difference in credit score knowledge reflected income. For example, only 55 percent of those with household incomes under $25,000 correctly identified three ways to raise a low credit score compared to 73 percent 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 scores

Consistently make loan payments on time every month. A late payment can lower a credit scores by dozens of points
Use only a small portion of the credit available on a credit card
Pay down credit card debt rather than shift it to another credit card or home equity loan
Regularly check credit reports to make sure they’re error-free. That 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, that allows consumers to test their credit score knowledge by answering 12 questions. It’s also available in Spanish.