How Much Do You Know About Credit Scores?

A survey done by the Consumer Federation of America (CFA) in 2004 shows that almost half of all Americans are unclear about what a credit score measures and other important facts.

Only about a third of the respondents understood what the credit score measures. The credit score measures a person’s credit risk. Banks and other creditors use this to assess how likely you are to repay a loan or credit card in a timely manner. It does not evaluate or take into account a person’s income, age or marital status.

Most of the people questioned knew that creditors use credit score, but less than half were aware that electric utilities, home insurers and landlords and even employers often use credit scores to determine whether to sell you their service, hire you, or charge you a higher price.

More than half incorrectly believe that people who are married have a combined credit score. Each individual has his or her own credit score. In fact, more than two-fifths are not aware that each person has not just one, but three separate credit scores. Each of the major credit bureaus, Experian, Equifax and Transunion, calculate their own credit scores based on the information of each different credit report. Credit scores may differ based on which creditors report to which credit agencies.

Consumers are also confused about what is considered to be a good or bad score. If your score is below the low 600s, you will be denied credit or have to pay a much higher subprime interest rate. Scores above the low 700s will enable you to qualify for the lowest interest rates.

Do you know how to improve your credit score? Only 60% of those surveyed were clear that paying off a high balance on a credit card would raise your score. More than one in four surveyed incorrectly thought that maxing your credit card would raise your score. In fact, it would make it go down.

Almost three quarters of the survey respondents thought that you can get your credit score for free once a year. Actually, there is a charge to get your credit score, although you can receive a free copy of your credit report once a year at no charge.