Consumers Often Get Basic Credit Score Details Wrong

Most consumers know the basic facts about how their credit score works, but they’re not so savvy on important details that can cost them thousands of dollars, according to a recent national survey.

More than 80% of the people responding to the sixth annual credit survey by the Consumer Federation of America and VantageScore Solutions know the basic facts about credit scores, including:

Credit scores are used by mortgage lenders (88% knew this) and credit card issuers (87%).

• Key factors used to calculate credit scores are missed payments (91%), personal bankruptcy (86%), and high credit card balances (85%).
• Ethnic origin is not used to calculate these scores (12% believed this).
• 700 is a good credit score (81%).

“The good news is that consumers understand the basics of credit scores, such as the importance of making loan payments on time,” said Stephen Brobeck, CFA’s executive director, in a statement. “The bad news is that this knowledge is limited and each year, can cost them hundreds of dollars in fees on services as well as additional interest on consumer loans.”

Credit score costs are in the details

Despite that basic knowledge about credit scores, many people don’t understand the details of how they work and the cost implications.

Based on survey results, here are four credit score details that many people didn’t know:

Underestimating the cost of low credit scores: Only 22% of borrowers surveyed understood the implications of having a low score compared to a high score. For example, the purchase of a $20,000 vehicle with a 60 month loan may increase the cost to someone with a poor credit score by more than $5,000. The difference being someone with a higher score may qualify for a 5% rate whereas someone with a lower score may pay up to a 20% interest rate.

Credit scores are used by non-creditors: Only about half (53%) know that electric utilities may use credit scores, such as in determining the initial required deposit. About two-thirds know that these scores may be used by home insurers (66%), cell phone companies (68%) and landlords (70%).

Marriage and age don’t affect credit scores: Approximately 42% of those surveyed thought marital status and age were used in calculating credit scores. This is inaccurate. However, these factors may influence the use of credit (e.g., higher balances and late payments are used to determine credit scores).

Consumers must be told when their credit score is being used: When surveyed, about 51% of consumers know when lenders are required to inform borrowers of their use of credit scores. For instance, when a borrower applies for a loan and is turned down, the lender must provide factors contributing to their decision.

A credit score, as we’ve written before, measures your risk of not repaying a loan. It includes information such as missed loan payments, high credit card balances and public records.

By not knowing how credit works as well as proven strategies to improve on it, you can cost yourself hundreds and even thousands of dollars in loan costs per year. It’s a number worth knowing the details about.