CFA Study: Most Consumers Under A Lot of Illusions About Credit Scores

WASHINGTON – While companies and organization increasingly rely on credit scores to make decisions on consumers, most Americans do not understand these critical pieces of information. Not only that, findings from a new survey from Consumer Federation of America and Providian Financial show most consumers don’t understand what credit scores measure, what good and bad scores are, and how scores can be improved. Results of the survey were disclosed Sept. 21 by CFA Executive Director Stephen Brobeck and Providian SVP Alan Elias. The survey was based on the responses of 1,027 representative adult Americans and was conducted for CFA and Providian Financial by the Opinion Research Corp. Among those surveyed, most consumers correctly understand that lenders use credit scores but only a minority know that electric utilities (30%), home insurers (47%) and landlords (48%) also frequently use credit scores to decide whether to sell a service and at what price. If there was one good piece of news that came out of the survey it was that most consumers (59%) recognize that their knowledge of credit scores is poor or fair, and therefore they’re more likely to seek this knowledge once they understand how important credit scores are. Many consumers may not have taken the time to learn more about credit scores because they don’t know how scores affect the available and price of credit, said Providian SVP Alan Elias. Among the highlights of the study: * Only 34% of consumers correctly understand that credit scores indicate the risk of not repaying a loan, not the financial resources to pay back loans or knowledge of consumer credit. CFA says this low percentage “appears to reflect the misconception that credit scores evaluate factors like income (65%), age (38%), and marital status (37%), rather than a person’s credit history. * More than half (52%) of survey respondents incorrectly believe that a married couple has a combined credit score, and more than two-fifth incorrectly believe that individuals have only one score. In fact, each of the three major credit bureaus – TransUnion, Experian, and Equifax – computes separate scores that usually differ. * Few consumers know what constitutes a good credit score. Only 12% correctly identified the low 600s as the level below which they would be denied credit or have to pay a higher, subprime rate. One-third of respondents indicated they thought the level was the low 500s, and 30% said they didn’t know. Only 13% correctly understand that scores above the low 700s usually qualify them for the lowest rates. * Many consumers don’t understand how to improve their credit score. Forty percent don’t understand that paying off a large balance on a credit card will improve their credit score, and more than one-quarter – 28% – believe incorrectly that using a credit card’s full credit line will improve a consumer’s credit score. * Nearly three-quarters incorrectly believe they can obtain their credit score for free once a year. What’s more, says CFA and Providian, consumers who consider their knowledge of credit scores to be low know the least about these scores. Moreover, consumers who think their knowledge about credit scores is “excellent” frequently answered knowledge questions incorrectly. This lack of knowledge, says CFA and Providian, exists despite the fact that those who have had credit card payment difficulties know more about these scores than those who haven’t had problems like these (not surprisingly, they say, credit cardholders with the lowest incomes have had the most payment difficulties.) Commenting on the results of the survey, Providian’s Elias said the findings of the survey “clearly show that while education about credit scores is available, consumers today are still far from `knowing the score’ “. -