According to a recent study conducted by Consumer Federation of America (CFA) and Vantage Score Solutions, an astonishingly large number of Americans do not understand credit scores. CFA and Vantage estimate that between one-quarter and two-fifth of consumers lack in their understanding of credit; this equates to millions of Americans! If consumers do not understand the credit system or the impact it has on their lives, the result will be this: they, along with millions of others, will become economically disadvantaged.
CFA and Vantage Score Solutions have taken steps to educate consumers as a result of their findings. The consumer study involved 1,022 participants. Findings were based on incorrect answers to a number of credit awareness questions on the survey. For example:
– Two-fifths did not know mortgage lenders and credit card issuers are factors in determining credit availability and pricing.
– Two-fifths did not know that personal characteristics are not factored into their credit score (marriage status, age, etc.).
– Between one-quarter and one-third did not understand key ways to maintain or raise their credit score such as keeping card balances low (26%) and not applying for more than one card at a time (28%).
– More than one-quarter did not know that lenders are required to inform borrowers of the credit score they used to make their decision regarding the borrower’s loan.
– Many consumers do not understand that cosigning a loan, including student loans, can affect their credit negatively if the student makes even one late payment.
In an effort to educate consumers, CFA and Vantage Score created an interactive quiz. Consumers can take the quiz quickly and find out what they know — or don’t know — about how credit is built, as well as the factors that bring credit scores down. The companies hope that consumers will become empowered to be better credit managers as a result. The smartly-styled quiz can be found at www.CreditScoreQuiz.org and www.CreditScoreQuiz.org/Espanol.
Misconceptions about credit have a negative impact on one’s credit score. In order to make better decisions that build credit, consumers first need to understand credit. Barrett Burns, CEO of Vantage Score Solutions, says, “People who fail to understand exactly what can impact their scores have little incentive to manage the things that truly make a difference.”
What makes sense in the credit world is not necessarily common sense. For example, if someone experiences difficulty paying their credit card debt, they might think accepting a new credit card is wise, since they need money. However, if they are wise they will turn down every credit card they are offered at retail stores, for this will negatively impact their score by opening new accounts and maxing out the limit.
In another case, someone might make monthly payments on their credit card balances, but they never seem to bring the balance down to below 40% of the card limit. They don’t realize that carrying a high balance is harmful to their credit. The credit bureaus score the amount of balance on your credit card compared to the limit amount. The closer the balance on the credit card is to the limit, the more points you lose on your credit score. The general agreement is to hold your credit card balance below 40% of the limit.
Unfortunately, abandoning credit is the wrong action to take today. In order to make the credit system work for you, you must learn the rules and play by them. No one is free from the credit system. Whether you’re applying for a home loan, a renter’s lease, cell phones, utilities, or jobs, your credit score will impact your situation.
You need credit on your side when you make a large purchase, like a car, so that you will receive a better interest rate and thereby save money on the cost of your car. One of the questions on the CFA/Vantage Score quiz asks how much more money a person with a low credit score will pay on a car loan for $20,000. The answer is $5,000 or more. However, 80% of the participants who took the quiz underestimated the impact a low credit score will have on a car loan.
Interestingly, the survey found that more women than men correctly understand credit. The good news for men and women is that your credit score can improve. You have to learn what to focus your energy on. Education is the key to raising your credit and prospering in the future. We’re here to guide you and provide resources so that you are empowered to manage your credit.
The best things you can do for positive credit results are:
-Pay bills on time, every time
-Keep credit balances 25% below card limits
-Avoid opening multiple new credit accounts rapidly
-Check credit report for errors
To learn about these rules of credit go to www.creditjusticeservices.com for FREE information.
Douglas Muir, CEO
Credit Justice Services