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Americans’ Credit Score Knowledge Lacking, Says Study

While most Americans rely on credit in one form or another, many lack knowledge on some basic concepts. According to a recent report from the Consumer Federation of America, many U.S. consumers lack knowledge of five essential credit score basics and concepts.

New Study Highlights Consumer Gap in Credit Score Basics Knowledge

VantageScore and the Consumer Federation of America’s (CFA) new study involved 1,001 participants and divides the results between those consumers with an average household income below $25,000, and those with a household income of over $75,000. Here are the results:

  • Consumers with a lower income were more likely to apply for credit within the next 12 months
  • Those same consumers had less credit score knowledge (on average) than those with higher annual incomes
  • Many of all the respondents didn’t understand five basic credit concepts

Five Basic Credit Concepts Many People Don’t Understand

So, what are the five credit score basics and concepts that respondents failed to fully grasp?

Credit Scores Measure Your Risk of Not Paying

One-third (33%) of respondents correctly knew that your credit score measures your ability to repay balances on your lines of credit. Fourteen percent thought credit scores measure an applicant’s attitude towards credit – and not their risk of paying.

Credit scores measure a wide variety of factors, with payment history being the most important of those indicators. FICO, the scoring model used by more than 90% of lenders, for example, bases 35% of its overall credit score formula on a consumer’s risk of missing payments. VantageScore, the other major scoring model, places a weight of 32% on payment history, as seen in the graph below:

Related Article: What Are the Easiest Credit Cards for Bad Credit to Get?

Bad Credit Can Cost You Thousands of Dollars

Only 22% of respondents in the CFA poll knew that a low credit score is likely to cost thousands of dollars more in interest on a loan than a borrower with good or excellent credit will have to pay. On average, a person with a high credit score will save $5,000 on a $20,000 loan with a 60-month repayment term, as opposed to someone with a low credit score.

Approximately 34% of Americans have what is known as “subprime credit.” A subprime credit score (or deep subprime score for those with very poor credit) means higher interest rates, lower credit limits, and fewer choices for credit cards, loans, and other products.

Related Article: What Are the Best Secured Cards for Rebuilding Credit?

Your Age Does Not Directly Impact Your Credit Score

Almost half (48%) of those surveyed believed that credit scores take age into account. While the length of credit/average age of credit is a factor, it makes up only a smart portion of a credit score.

Those who are older likely have a longer credit history, but this isn’t always the case. And those with a longer credit history and a history of missed payments will feel stronger effects than those with a shorter credit history but a record of on-time payments.

Utility Companies Can Run Credit Checks

Half of the respondents (50%) did not know that utility companies can conduct a credit check. This credit score knowledge oversight can also cost consumers money. Many consumers aren’t aware that a bad credit score can cost you when setting up your utilities after a move.

The electricity or gas company, for example, might request a deposit from someone with a history of late – or missed – payments. These deposits may run into hundreds of dollars. Those with good credit, on the other hand, likely won’t need to make any deposits when turning on their utilities after a move.

You Can Do Some Credit Repair Company Services Yourself

There are plenty of credit repair services available. Many of them, including the likes of CreditZO and Self, are highly-rated and serve an essential purpose in rebuilding credit.

That said, some aspects of credit repair are doable by the average consumer. 42% of respondents were unaware that they could submit disputes to the three major credit bureaus – Experian, Equifax, and TransUnion – via phone, online, or by mail.

Related Article: Why It’s Important to Check Your Credit Report Now

Conclusion

While many Americans misunderstand some basic credit score concepts, that doesn’t mean they can’t increase their knowledge. Unless someone has a super-prime credit score of 850, there is always room for improvement. And even if someone has a perfect credit score, they will need to maintain it with best practices.

Fortunately, there is a great selection of credit resources on the web (including those here at BestCards.com). These resources can help you improve your credit knowledge base and open the door to better interest rates, higher credit limits, and lucrative rewards or signup bonuses in the future.

Related Article: What Is the Average Credit Card APR?

About: Cory
Cory Santos

Cory is BestCards.com's "Jack of all trades" and resident rewards expert, covering all facets of the points game – especially travel, hotels, and airlines. In addition to credit cards, Cory finds that jogging, cats, and memes are essential parts of a balanced day.