While most Americans likely know how important their credit score is to their finances, it seems that when it comes to basic knowledge of how they work or are used, many are also well behind where they should be.
There is a general lack of understanding about credit scores among many American borrowers, and that could put them at significant financial risk going forward, according to a survey from the Consumer Federation of America and VantageScore Solutions.
For instance, many did not know that lenders use credit scores to determine not only whether a person is able to obtain credit, but also how much it costs them; 42 percent were unaware that mortgage lenders did so, and four in 10 didn’t know credit card lenders do as well.
“Credit scores have become so influential in the lives of most consumers that tens of millions are severely disadvantaged by their lack of knowledge about these scores,” said Stephen Brobeck, CFA’s executive director. “Low credit scores will often cost car buyers more than $5,000 in additional finance charges and cost home purchasers tens of thousands of dollars in additional mortgage loan costs. And low scores are likely to limit consumer access to, and increase the cost of, services such as cell phone service, electric service, and rental housing.”
Similarly, about the same number of people who have misconceptions about how their scores are evaluated also believe that things that do not count toward a person’s score are included, the report said. For instance, 43 percent thought their age was a factor, while 40 percent felt the same way about their marriage status. Neither of these aspects are factored into credit scoring models.
A little more than a quarter each also do not know that avoiding numerous applications for new accounts and keeping their credit card balances low are vital to maintaining a high rating, the report said. In general, women tend to know more about how credit scores work than do men, but interestingly, young people who had limited credit access were about as knowledgeable as all other age groups.
Consumers should try to keep a close eye on their credit standing overall, as the role this rating will play in their lives going forward can impact more areas than they might have expected.
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