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Paul Sakuma / AP
A bad score could cost you a loan. That's why it's so important for you to understand how credit scoring works.
Your credit score, which is based on your credit history, can have an enormous effect – positive or negative – on your life. A good score could save you thousands of dollars a year in interest. A bad score could cost you a loan. That’s why it’s so important for you to understand how credit scoring works.
A new surveyby the Consumer Federation of America (CFA) and VantageScore Solutions shows overall knowledge about credit scores has improved significantly in the past year. But the results also make it clear there’s still a long way to go.
Many consumers still need to learn about what scores represent, how to get access to them and how to improve them,” notes CFA’s executive director Stephen Brobeck.
Fewer than half (44 percent) of those surveyed are aware that a credit score typically measures risk of not repaying loans, rather than the amount of debt or financial resources you have. Only 29 percent know how costly a low score can be.
“Very few people understand that on a conventional new car loan ($20,000 for 60 months) if they have a low score that will cost them $5,000 more in additional interest charges than a borrower with a high credit score,” Brobeck says.
One of the most troubling findings: more than half the respondents still think, incorrectly, that a person’s age and marital status are used to calculate credit score. One-fifth (21 percent) incorrectly believe ethnic origin is a factor.
“Your ethnicity isn’t even on your credit report, so it’s impossible for it to be a factor in computing your credit score,” explains John Ulzheimer, president of consumer education at SmartCredit.com. “Your credit score is not influenced by anybody but you. Your own actions completely determine the score.”
One key area of misunderstanding: the impact of multiple credit checks while applying for a loan during a one to two week period. Few people (only 9 percent) know that shopping for a loan like this will not lower their credit score.
“If people are not shopping for credit because they think it will negatively impact their credit score, that’s not good,” says Adam Levin, chairman of credit.com. “People need to shop around and get the best deal at the best rate. That’s good for the consumer and good for the economy.”
Despite years of warnings about credit repair companies, more than half the people contacted (51 percent) believe that these companies are “always” or “usually” helpful in correcting credit report errors and improving scores. That’s troubling.
“Experts around the country are in almost complete agreement that these credit repair companies overpromise, charge high prices and also perform services that consumers could do for themselves,” CFA’s Brobeck warns.
The Consumer Federation of America says there are ways to raise your credit score.
- Consistently pay your bills on time every month.
- Don’t max out, or even come close to maxing out, your credit cards or other revolving credit accounts.
- Pay down debt. Don’t just move it around.
- Don’t open a lot of new accounts rapidly.
- Check your credit reports from each of the three big credit reporting agencies throughout the year to make sure they are error-free. You can get one free copy from each bureau every twelve months. Use this website -- www.annualcreditreport.com -- or call 877-322-8228. You must give your Social Security number since this is how credit reports are tracked.
How much do you know about credit scores and credit reports? Take the CreditScoreQuiz. There is also a Spanish language version.
- More information:
ConsumerMan: Credit Information that’s really, 100% free - Federal Trade Commission: Credit Repair
- Federal Trade Commission: How to Dispute Credit Report Errors
- FICO: Credit Basics
Leave a Comment:
A few lessons we have learned about credit reporting. We have excellent financial history.
1. When you contest a charge that goes on your credit report and should be removed when resolved by the CC company. Doesn't always happen and is a pain to get corrected.
2. When you are pre-approved for a mortgage and it takes a long time to find a property, your lender may check multiple times. We had to submit a letter to the agencies (written by our lender) that these were routine. Our numbers have dropped 20-40 points because of this.
3. We use ONE credit card to pay for almost everything in our life. We don't write many checks except for bills, don't make purchases with our ATM card. Our credit report states that we carry too large a balance on our CC. It does not recognize that we pay this off in full each month and have done so for 15+ years. We have earned enough points to have free hotel rooms for ourselves and our family whenever needed.
DO check your reports at least once a year.
DO question anything you don't understand.
DO ask your bank for phone numbers for these agencies, it is very hard to find out how to talk to a person at them. DO follow up with and keep copies of all correspondence.
Credit ratings agencies should be run like public utilities.
All of these credit reporting agencies need government oversight. If you have a problem with them the ONLY way you can affect change is to take them to small claims court, which is expensive.
The credit ratings agencies have the perverse incentive to keep your scores low because they make money every time you or others look up the score.
Either the government needs to run these agencies or they need to be carefully monitored by an oversight group which responds to the citizens who are being abused by these for-profit companies.
The "credit score" industry works hard every day to convince you that you are "consumer" and not an American Citizen.
Society needs to end usury first of all and secondly, experion, transunion, and equifax need to be dismantled and replaced with a system that is more responsive to citizens.
The word "consumer" is degrading. Why not just call us "eaters".
"Check your eater credit score once per year!" You want a good eater score don't you? Goooood little eaters....here is your cracker.
Using credit scores as a determining factor for employment has to be one of the stupidest ideas ever. The poor guy who is late on his payments because of layoff or underemployment will probably work harder at his job (because he really needs it) than someone who is already employed & job-hopping.
You raise a good point. The debt-slave can be the best employee - he has to go to work.
Similarly, as a landlord, I found that some tenants, if they had troubles in the past, but were trying to turn their lives around, made very good tenants (and since they could not qualify for a mortgage, they stayed on for a long time).
But, if someone is serially insolvent and walks away from numerous debts, they are not a good risk for employment or tenancy.
And usually, that is what employers are looking for. They are not going to spike you for having a 700 score, or even in the 600's. But 550 and under? You are a deadbeat.
ALSO, I can say as both employer and landlord that I looked at the overall REPORT, not the SCORE. The score is really only useful to car dealers and consumer loan places, who approve loans in bulk, based on score (or use the score as justification to steer you to odious financing instruments).
Your overall credit HISTORY, to me, is more telling than some computer-generated number. The fact that you were late on your Sears card in college is less relevant than the fact you walked away from a car loan.
Anyone who relies on score alone, is missing the better story.
What indicates that employers can obtain credit scores?
The reference to scores being used by employers has been removed. Scores are not and have never been used or even available to employers for employee screening.
The annualcreditreport.com site does not give you your credit score, just the credit history. theres no way to tell or compare your history to the average person or what that history qualifies you for.
Yes, but you can pretty much parse or your score from your history. And for $7 or so, one of the agencies will give you a one-time score report, if you are that curious.
Just pay your bills on time, borrow less, and your score will be stellar.
Obsessing about credit scores and looking at life as a series of loans to be paid off, is not a good plan.
But a lot of people do this - eager to see what POS they are now qualified to buy, based on their credit score.
Actually owning things is a lot less stress.
You can get your score, IF you pay a monthly fee to monitor your credit. BUT, trying to get something corrected, especially if it involves an anti-customer company like Bank of America, is like pulling teeth. So far EIGHT MONTHS and they STILL can't get the correct information to the credit bureaus.
Funny, thing, I am self-employed and debt-free, so I don't really need a credit score for anything, and yea it is well over 800.
The old saying is true, if you want to borrow money, you first have to prove you don't need it. And if you don't really need it, you are offered the best deals. But if you desperately need to borrow money, well, you get the rawest deals possible - which keep you in perpetual debt-slavery. It is a vicious circle.
But I check the report every year on annualcreditreport.com just to see if there is bogus information or someone trying to get cute. It is just a hassle if someone opens up a fake account in your name.
The biggest dent in your credit report will occur if you are late on a mortgage payment. It can knock your score down by 100 points or more.
Back in the 1980, my mortgage was sold from one bank to another, right after they signed me up for automatic payment deduction. I got instructions to send my payment to the new bank, after the old bank had already done the deduction. They said, not to worry and it would "catch up, eventually".
Two years later, applying for another loan, I was surprised to see it appear on my report as "mortgage payment over 30 days late". I was able to resolve it with one phone call. I noted some other false "late payment" listings, and called the companies reporting and they corrected the information.
My friends in the mortgage business tell me that today, when a mortgage is sold, they do not report late payments for at least two months, because of the issues like I had.
But the best way to have a good credit score is not in "gaming" the system, but in just paying your bills on time. And the easiest way to do this, is to not "stress" yourself with unnecessary debt.
And over time, your debt load should DECREASE, not INCREASE. Too many people (myself included) "took out equity" from their homes to pay off credit card debt in the 1990's and 2000's - and then rewarded their financial acumen by running up more credit card debt. And then they went out and financed or leased brand-new cars every few years.
All that debt has to be paid off, eventually.
I would caution Sarah about playing the frequent flyer game. Those "rewards" cards are baited with little tidbits, but the trap is far greater. Intractable Credit Card debt, with interest rates of 20% or more, can sneak up on you very quickly.
Yes, you pay it off every month, but then there is that ONE MONTH when you don't, for whatever reason. It may not happen for five, ten, maybe 15 years. But when it does, the effect snowballs quickly. Suddenly, in another five years, you wake up one day to realize you have $20,000 of credit card debt (ask me how I know).
All the free hotel rooms (value $99) or flights to Duluth (value, ditto) are not worth years of digging your way out of that debt. That is why the credit card companies use this BAIT to get you into trouble.
I have one low-rate (7.15%) card with a low limit ($5000) and I told the card company to not raise the limit automatically. And I set up AUTOPAY to make sure the minimum payment is always made, even if I forget (this avoids the 25% penalty rate).
But being debt-free, and I mean utterly debt-free is far better than frequent flyer miles and free hotel rooms. People chase after these penny-ante deals, thinking they are being "smart consumers" when in fact they are just being herded down that chute at the slaughterhouse, only to face a captured-bolt gun and the abattoir at the end.
Chasing after debt and your credit score is to chase after a false God. You are not your credit score. Getting a loan is not a privilege - it has to be paid back.
You can't borrow your way to wealth, only to poverty. And owning YOURSELF is better than a fancy new car, or frequent flyer miles.
Amen to that!
Robert, you keep mentioning that you are debt free in what appears to be an effort to deminish your need for concern about good credit. It's good that you apparently pay your bills, oops you don't have any bills. Or at least any that could have any potential impact on your credit score. That means you don't have a cell phone, you don't have access to the internet, that seems strange in light of your post, in fact you must not have any recurring monthly expenses. Now, let me share something with you. I am pretty sure you have automobile insurance and probably homeowners insurance. The rates consumers pay for these two items are definately impacted by their credit score. The insurance companies have determined that there is a very distinct correlation between credit scores and claims history. Just so you and the rest will know, not owing any money doesn't improve ones credit score. A lack of recent credit history will actually lower the score. The actual credit score number is a measure or ones probability of being 120 days or more late on a payment sometime within the next 6 months. What the credit report represents is ones ability and willingness to repay a debt. If you have no debt, there is no way to determine either of these two outcomes. Owing money and paying bills on time improves ones credit score. Nothing else will.
"You can't borrow your way to wealth only poverty."
How do you explain the ENTIRE financial system then? Money is issued via the Fed as a loan with interest.
If nobody borrowed money, the money supply could not expand and therefore the interest could never be repaid. The economy would collapse in a deflationary type 1a supernova of destruction and we would all be reduced to barter.
The problem isn't really the borrowing itself, remember the Louisiana purchase?, its the usury interest rates and the ratings system itself which has the net effect of a wealth transfer from the poorest among us to the richest among us.
Even an 800 score can get you turned down if you are solely using cash. A result of that? A notification that you are turned down because you have no current credit history.
And that was the point of this article - to establish in the consumer's mind that your credit score is so important to your life.
It is establishing and reinforcing a normative cue to get the plebes to believe this entire sham act.
Why? Because MSNBC panders to advertisers, who want you to obsess about your credit score and what new POS car you will "qualified" to buy next.
Because that is what life is, right? Just a series of loan payments? Right?
Or could there be so much more?
Do you really think the reporter wrote the article to pander to advertisers? Really? If you did 8 seconds of research you'd see that his article is based on newly released data from a joint survey performed by the Consumer Federation of America and VantageScore Solutions. Geez, some of you people would complain about the color of the ink on your lottery winning's check. Hyper-sensitive.
The whole credit reporting system needs to be scraped. I have had a black mark from my uncles account show up on my report, a tool salesman put a black mark on my report because he was being dishonest, and I have had other marks from accounts that I never heard of.
Also I feel that if a company like say the telephone company can give you black marks then they also should be required to give you good marks.
Right now there are a lot of companies that can damage your credit report but the are not required to post the good.
Companies that make false reports even if they are of a clerical nature should face a fine payable to the person and false negatives would diminish.
Right now the burden of clearing up a false report falls on the consummer, and it can take thousands of dollars to fix a companies mistake and the cost falls on the consumer.
When I contacted a credit bureau about a mortgage loan being
reported as an installment loan the whole account was removed from my credit
report this had the effect of lowering my credit score.
Since, as the article points out, credit scores are so important for people, they ought to be available on a regular basis without charge.
This article would have been more useful had it discussed free (or very low cost) ways to obtain your credit score. One technique which I've used is to sign up for one of the services that allows you to cancel without fee within 30 days. If you do this you can then get your credit score right away. You just have to be sure to take their somewhat roundabout steps to then cancel the service. They'll try to talk you into keeping it, but be insistent. The more insistent you are the sooner you can complete the process, which I think usually has to be done by phone. Then check to make sure you're not billed on your credit card.
www.annualcreditreport.com is absolutely free. There is another advistised service on this website, however, you do not have to sign-up for that offer to receive your free credit report.
You can get a free score from CreditSesame.com or CreditKarma.com. The scores they give away are free and don't require a credit card number of subscription to any service. They're not FICO scores but they're a good approximation. The scores they give away are commercially available so it's possible a lender could use them. Other free scores given away by other sites are educational scores and not commercially available so it's not possible for lenders to use them.
Credit reporting agencies are a scam.
Too bad we all need these damn scores that are manipulated by the same companies that extend us the credit we so desperately need.
Good article, however, it still will not help the allying middle class. According to economists over 1/4 of the middle class population are in debt over their heads due to the recent recession. Underwater mortgages, unemployment etc. On top of it all, financial reform has contributed to many middle class citizens not being able to get loans or mortgages, because you need a near perfect credit score, no risk. A no win situation.
Unfortunately it has become another bottom line industry that really has very little of a direct correlation to one's credit worthiness. They are rife with errors, and anyone with a computer can have only a negative effect on your score, and many American's scores have suffered through no fault of their own. First will come the pop of the ever building second financial bubble and then will come irrelevance of this credit score industry. The best strategy is to wean yourself into a cash only financial model. It is the only way you will have control over your financial abilities.