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Most of us don't 'get' credit scores

Despite having plenty of debt, Americans don't really understand how credit ratings are calculated or what they mean.

By MSN Money Partner May 15, 2012 2:29PM

This post comes from Brian O'Connell at partner site MainStreet.

 

A new report out from the Consumer Federation of America leaves a big impression about the U.S. consumer, and it's not a pleasant one.

 

Americans, it seems, just don't know much about their credit scores -- Image: Woman with computer (© Jose Luis Pelaez/Getty Images/Getty Images)specifically, how they're calculated and what impacts them the most.

 

That's not good news for tens of millions of Americans mired in debt. Bad credit can lead to more debt, as banks and lenders tack on extra fees and higher interest rates to extend credit to riskier consumers -- in other words, those with lower credit ratings.

 

To get an idea how deeply consumers are mired in debt take a look at these numbers:

  • Total U.S. revolving debt (98% of which is credit card debt) = $801 billion, as of December 2011, according to the Federal Reserve.
  • Total U.S. consumer debt = $25 trillion, according to the Fed.
  • U.S. credit card 30-day delinquency rate in January 2012 = 2.93%.

With that much cash on the line, why is it that Americans have a tough time getting a grip on their credit scores?

 

What we don't know

In a new study released this week by the Consumer Federation (the Second Annual Survey of Consumer Knowledge About Credit Scores), year-to-year consumer understanding of credit scores is up slightly, but that's the only piece of encouraging news from the report.

 

The federation says that, by and large, U.S consumers . . . 

  • Don't know how costly low credit scores can be to the pocketbook.
  • Don't know that multiple credit inquiries can hurt their scores.
  • Underestimate the risk of paying for, and working with, a credit repair service.

For its part, the federation views the study results through a "good news, bad news" prism.

 

"In the numerous consumer knowledge surveys we have undertaken over the past several decades, I have never seen such improvement from one year to the next," explains Stephen Brobeck, CFA's executive director, in a statement. "However, credit reports and scores are so important to consumers that they should try to improve knowledge that remains deficient in several key areas."

 

Consumers did show positive signs on credit knowledge in some areas, especially which service providers actually provided credit scores; the fact that consumers have more than one credit score; and how to raise their credit score. All were up moderately according to the survey.

 

But only 29% of consumers knew that, on a $20,000 auto loan, borrowers with low credit would pay $5,000 or more than a consumer with high credit over the life of the auto loan.

 

Additionally, only 44% of survey respondents knew that credit scores were based on a person's ability (or inability) to pay a loan or a bill, and that scores weren't strictly measured by debt alone.

The federation calls that knowledge gap a "serious misunderstanding" on the part of American consumers. Left as is, consumers may find their lack of credit knowledge will end up hurting them where it hurts most -- in the bank account -- in an economy where money is tight, and consumers are tossing nickels around like manhole covers.

 

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49Comments
May 23, 2012 10:58AM
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The problem with credit scores that we as consumers get is that they don't match the credit scores that institutions pull on us. A few years ago I applied for an equity loan. I asked the loan manager what reporting agency they use so I could pull the same report for my own records. What I found was an 80 point difference in the credit score reported to me and what the bank received. When I questioned it I was told they use a different scale depending on if the requester is the consumer or a lender. My score was in the high 700's which I was ok with but was disappointed when the bank told me I was just below 700. What good is it to know our credit score when it's not accurate with what the lenders see?
Jun 19, 2012 8:40PM
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A Message For All The Banks and Their Shills (the credit bureaus)...

Take your credit scores and shove them where the sun doesn't shine !!!

May 15, 2012 6:26PM
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First off....Credit inquiries should not hurt your scores because your shopping around for the best rate! That is one of the most idiotic things that doesn't make sense.

 

Second....Credit bureaus should not be able to sell your information to others! Somehow, we the people are being automatically being sold down the river when they should have to get permission from us in the first place not the other way around! We should not have to go and opt out for something thats a no brainer!

 

 

Third.....They should be held fully accountable for any errors on your credit report because it is so highly regarded and effects everything in your life. It's totally ridiculous that we are treated like second rate citizens when dealing with these people. People steal peoples identities then cause chaos and even when you have proof of all this they still don't want to fix information. Companies report bad stuff in error and even when you come up with proof they don't want to fix your info.  

May 15, 2012 7:10PM
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After almost 2 years in the United States I cannot understand how 3 private companies can contol and threaten the lives of millions of Americans.  When I found out that these 3 private companies had all my private information and I had no say so as to what information goes on my credit report I was shocked, how did Americans let this happen!!  

 

When I read and hear the horror stories of the mistakes these companies make and the Hoops they make Americans go through to address them it seems like fiction.  My credit report from Experian states that my debt is too high!  The fact is I have never had a debt in my life and I pay small credit card charges every month in full.

 

Again when I read and hear that credit scores are checked for various reasons i.e. job applications, potential spouses, etc I couldn't believe it!!  This system doesn't exist in Europe and as I prepare to return to Europe I really feel bad for Americans having to put up with this system they never asked for.  I agree with the home of the brave but have serious doubts about "Land of the Free"  Arrivaderci!!

Jun 19, 2012 7:49PM
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Most people get credit scores, they are a scam created by the financial industry. The scores are based on faulty secret algorithms that are hidden from the public. If it was on the up and up, there would be transparency. So how would the public "get credit scores" if it's kept from them?
May 15, 2012 6:29PM
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This article was supposed to tell us how to understand our credit scores, but just told the world we don't know exactly how they are determined. How about some REAL information about how they are determined? Keeping us in the dark only helps the lenders. (maybe we should look at who sponsored this "article")
May 16, 2012 12:54AM
May 15, 2012 7:18PM
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What a useless article. The headline/premise is that most Americans don't understand how their credit score is calculated and yet instead of explaining the mystery, this article belittles us for not understanding how a bad score affects us. For goodness sake, I am fully aware of how my score affects me. Tell me the logarithm that will help me increase my score.
May 15, 2012 8:14PM
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I don't need to be educated about credit scores.  Credit agencies need to be educated about ethics, and in some cases their employees need remedial math courses.
May 24, 2012 10:31AM
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"Don't know that multiple credit inquiries can hurt their scores."  Yeah, most of us know this but the problem is WE DON'T CONTROL the credit inquiries.  I get multiple hits every month from credit card companies who want to send me a credit card that I do not want.  This type of hit on my credit score (whatever it is, and I could care less) is beyond my control.  If I could control it, I'd stop all credit inquiries except for those that I have approved in advance and then maybe I'd care about my credit score... but, I will never pay to see what a credit reporting company "thinks" I'm worth by making up some number.  I've managed to get a mortgage and buy a new car, all without knowing my number.
May 23, 2012 12:51AM
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What a worthless story. The question was correct.....did you "get" your credit scores. Most of these rip off sites for "free" credit dont give any effin scores at all. Just creditor info. Not a FICO score. Why not write a story about how many people don't "get it", because of these lousy business practices. That seem to be allowed by our glorious government.
May 15, 2012 7:59PM
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They know credit scores are a scam. The credit agencies use secret algorithms to come up with these fake made up numbers. They are allowing anyone who is claiming they are owed a debt access to a consumer's report. They know that the rules are always changing, for example, there was a story claiming if a consumer is carrying even 1% on the cc as debt it could have a negative impact. Then the next article claims if the consumer doesn't use credit it will also have a negative impact. The whole system is broken and rigged against the consumer so the financial companies can prey on them. This article is yet another attempt to bully, scare and threaten consumers. Regardless of what the consumers do, they will be overcharged.
May 15, 2012 7:43PM
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The whole credit score thing was invented by BANKS so they can deny credit or charge huge fees and interest rates.  People who pay for things they own, and don't purchase with credit can have low scores-because they don't use credit enough.    Someone who is wise with their money should never be considered a bigger risk when it comes to credit, but they are!
May 15, 2012 7:47PM
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Transunion, Experian and Equifax take information from our creditors as is. They are not required to check for accuracy. Furthermore they are not required to make sure that they are not filing multiple charges for the same debt. If you had a debt with Sears and they sent it to collections you now have 2 charges for the same debt on your record. One from Sears and one form the collection agency. They cannot do that. It will take you a lot longer to correct the mistakes on your credit report then it took the reporting agency to screw it up. Despite the laws they are not held accountable because no one can afford to take them to court. You are entitled to one free credit report each year from each reporting agency. You can download it off the net. It will not have your credit score unless you pay for it but it will have all the activity you need to check. Dispute everything but do it nicely. Type your dispute and reread it until you have it right. Have a good friend double check your work for spelling errors. The spell checker does not always work. When you are ready to mail the dispute to each credit-reporting agency send it REGISTERED MAIL. Make they sign for it and mark it on your calendar. They might try to BS you into believing you are breaking the law. Do not fall for it. You have a right to defend yourself against liable and slander.
May 15, 2012 6:36PM
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How about a story that provides really useful information?  For example, how many different credit scores are in common use?  What are the ranges of excellent, good, and poor scores?  Which scores are most reliable and/or most used by credit granting firms?  Everyone can get a credit report for free once a year.  What about your credit score?  Is it worth paying for if the credit reporting agency charges a fee? 
May 15, 2012 6:56PM
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The problem with credit scores is no two lenders use the same credit agency. I have great credit but it seems the report I get is higher than the ones actually used by the lender. I tend to think lenders try to find the lowest scores to charge you a higher rate. My most recent car loan was 3 percent so I am not complaining but when I was looking at lenders, I got different results from different lenders because they use different credit agencies.

 

There should be a standard when using credit scores. Should be the same for consumers as well as lenders and creditors when looking at my score.

May 15, 2012 7:05PM
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The biggest fraud on the American people of all time The Fair Credit Reporting Act. They the US government (Congress) sold us to the Banks and Credit Bureaus . These ASSES destroy peoples lives and dont give a darn. The American public should drag them out and horse whip them on the public streets.
May 23, 2012 10:35AM
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One thing that would help people, is they say you get one annual credit report but that report does not contain your scores you have to pay for the scores.  You just get a report on your accounts. I check my 3 free reports every year, it is unbelievable how  different the 3 are from one another.  How about 1 credit bureau and also explain how each item on the report raised or lower your score and by how much. Maybe also give some ideas on the report that says by paying down this card or this bill your credit will increase by a certain amount. Give people a better understanding how the system works.

May 15, 2012 6:58PM
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There needs to be an overhaul of the credit rating systems.  It takes too long for credit scores to rebound.  I think people would be more motivated to get their credit scores higher if they rebounded faster. 

May 15, 2012 7:49PM
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"Third.....They should be held fully accountable for any errors on your credit report because it is so highly regarded and effects everything in your life. It's totally ridiculous that we are treated like second rate citizens when dealing with these people."

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Unfortunately much of the problem surrounding this can be summed up in one phrase; corporate personhood, and the very fact that corporations were given the legal status to go along with it.  And yet when some wrong doing is involved, of course people can be put in jail, companies (as business entities/conglomerates) can not....  The very concept of corporate personhood and all that has come with it, has got to be one of the most convaluted arguments to have been put forth; which is in part why actual people have in many instances been relegated to second class citizens...  The corporate entity, under this very idea of corporate personhood, in many instances has arguably been afforded rights SUPERIOR to that afforded to real people....

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