Consumers Don't Understand Their Credit Scores, Do You?

As companies and organizations increasingly utilize credit scores to evaluate individuals as prospective customers, employees or tenants, it is essential that consumers know their credit score, understand what it means, and learn how to raise it. But according to a new survey developed by the Consumer Federation of America (CFA) and Providian Financial, most Americans do not understand credit scores even when they think their knowledge of credit is good.

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Most consumers do not understand what credit scores measure, what good and bad scores are, and how scores can be improved, according to the survey of 1027 representative adult Americans administered by the Opinion Research Corporation International for CFA and Providian in late July.

"Now that credit scores are increasingly used by utilities, insurers, and employers, as well as creditors, it is essential for consumers to learn their score and what it means," said CFA Executive Director Stephen Brobeck. "The cost of not knowing your score and its significance could be not only denial of credit but also difficulty obtaining needed services and even a job."

Most consumers surveyed correctly understand that lenders use credit scores, but only a minority know that electric utilities (30%), home insurers (47%), and landlords (48%) often use credit scores to decide whether to sell a service and at what price. The survey's good news is that most consumers (59%) recognize that their knowledge of credit scores is only poor or fair.

"Many consumers may not have taken the time to learn more about credit scores because they do not know how scores affect the availability and price of credit," said Providian Senior Vice President Alan Elias.

Most consumers do not understand the meaning of credit scores, their importance, how to obtain them, and how to improve them, according to the CFA/Providian survey (with a margin of error of plus or minus 3%).

  • Only about one-third (34%) correctly understand that credit scores indicate the risk of not repaying a loan, not factors like financial resources to pay back loans or knowledge of consumer credit.
  • More than one-half (52%) incorrectly believe that a married couple has a combined credit score.
  • Few consumers know what constitutes a good score. Only 12% correctly identified the low 600s as the level below which they would be denied credit or have to pay a higher, subprime rate. And, only 13% correctly understand that scores above the low 700s usually qualify them for the lowest rates.
  • Many consumers do not have a clear idea how to improve their credit score. Two-fifths (40%) don't understand that paying off a large balance on a credit card will improve one's credit score.
  • Many who try to learn their credit score in the future will be surprised to learn that there is often a charge. Nearly three-quarters (72%) incorrectly believe that they can obtain their credit score for free once a year. (That right was recently established for free access to one's credit report but not for free access to one's score except when applying for a mortgage loan.)

CFA and Providian believe all consumers should know five important facts about credit scores. You can obtain a list of those five key facts you should know. This week, the two groups also made available a new Web-based quiz, "Do You Know the Score on Credit Scores?".

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