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.
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 -- 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.
More on MainStreet and MSN Money:
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 !!!
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.
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!!
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.
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.
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.
"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."
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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