The Consumer Federation of America and VantageScore Solutions, LLC, released the findings from their sixth annual credit score survey. Their findings are mixed, showing that many consumers have a basic understanding of how a credit score operates, but that many consumers are missing out on a lot of how they work. They find that
a large majority of consumers (over 80%) know the basic facts about credit scores:
- Credit scores are used by mortgage lenders (88%) and credit card issuers (87%).
- Key factors used to calculate credit scores are missed payments (91%), personal bankruptcy (86%), and high credit card balances (85%).
- Ethnic origin is not used to calculate these scores (believed by only 12%).
- 700 is a good credit score (81%).
Yet, the national survey also revealed that many consumers do not understand credit score details with important cost implications:
- Most seriously, consumers greatly underestimate the cost of low credit scores. Only 22 percent know that a low score, compared to a high score, typically increases the cost of a $20,000, 60-month auto loan by more than $5,000.
- A significant minority do not know that credit scores are used by non-creditors. Only about half (53%) know that electric utilities may use credit scores (for example, in determining the initial required deposit), while only about two-thirds know that these scores may be used by home insurers (66%), cell phone companies (68%), and landlords (70%).
- Over two-fifths think that marital status (42%) and age (42%) are used in the calculation of credit scores. While these factors may influence the use of credit, how credit is used determines credit scores.
- Only about half of consumers (51%) know when lenders are required to inform borrowers of their use of credit scores – after a mortgage application, when a consumer does not receive the best terms on a consumer loan, and whenever a consumer is turned down for a loan.
Overall, I guess this is good news although it also seems consistent with what we know about financial literacy — people are still lacking when it comes to understanding how consumer finance works. That being said, it would be great if we could come up with strategies to improve financial literacy so that people can improve their financial decision-making. I am not yet hopeful, though, that we can.