Study: Credit Score Knowledge Lacking

Study: Credit Score Knowledge Lacking

NU Online News Service, Sept. 22, 11:13 a.m. EDT?A survey by a consumer group and a credit card firm has found most Americans, even those who believe they know the credit system, don't understand credit scores, the organizations said yesterday.[@@]

Conducted by the Opinion Research Center on behalf of the Consumer Federation of America and Providian Financial, the poll of 1,027 adults found that most do not understand credit scores even when they believe their knowledge of credit in general is good.

The practice of using consumer credit background to rate risks has strong support in the insurance community, which sees it as an objective guide to underwriting. However, some consumer advocates have advocated banning its use by insurers, saying its results can be skewed by a variety of factors and it unfairly impacts minority and low-income individuals.

"Now that credit scores are increasingly used by utilities, insurers and employers, as well as creditors, it is essential for consumers to learn their score and what it means," said Stephen Brobeck, executive director of the Washington-based CFA.

Mr. Brobeck warned, "The cost of not knowing your score and its significance could be not only denial of credit but also difficulty obtaining needed services and even a job."

Less than half of those surveyed, 30 percent, were aware that electric utilities use credit scores to decide whether to sell a service or for pricing.

Forty-seven percent were aware that home insurers use credit scores and 48 percent knew that landlords use the information. However, the survey found that the majority of Americans are at least aware of their ignorance regarding credit scores, with 59 percent rating their knowledge of the subject as "poor" or "fair."

"Many consumers may not have taken the time to learn more about credit scores because they do not know how scores affect the availability and price of credit," said Alan Elias, senior vice president of San Francisco-based Providian.

Most Americans, the survey showed, had no knowledge or incorrect knowledge about what a credit score actually measures, with only 34 percent recognizing it as a gauge of the likelihood of repaying a loan.

The percentage, according to the CFA, appeared to reflect the belief in several misconceptions surrounding credit scores. Approximately two-thirds, 65 percent, thought that income is a factor in credit scores, with minorities of 38 percent and 37 percent identifying age and marital status, respectively, as also factoring into a credit score.

"Only the record of their past use of credit determines the credit scores of consumers," said Mr. Brobeck.

Marriage proved to be a tricky subject for those surveyed. More than half, 52 percent, believed that a married couple has a combined credit score.

"You cannot raise your credit score by marrying someone with better credit," said Mr. Elias.

Even if consumers knew their credit scores, the survey showed that few understood what constitutes a good or bad score. Only 12 percent were able to identify the low 600s as the threshold below which they would be denied credit or have to pay a higher rate, and only 13 percent knew that scores above the low 700s typically qualify them for the lowest rates.

"It is meaningless to know your score if you don't know whether it is good or bad," said Mr. Brobeck.

Ironically, the study found that those with the most to lose, meaning those with the best credit, often knew less about credit scores, and that those who claimed to have "excellent" knowledge of credit were as likely to hold misconceptions about credit scores as those who said they had "fair" knowledge of credit.

Those with the lowest incomes and least education know the least about credit scores. For example, of those with incomes below $25,000, only 16 percent understand that a score measures credit-risk, only 24 percent know that the manufacturer Tenneco is not a credit bureau, and 62 percent incorrectly believe a married couple has a combined credit score.

Those who have had credit card payment problems or have obtained their credit score were more knowledgeable about credit scores, suggesting that consumers learn about credit scores largely by experience.

"When it comes to obtaining credit at the best possible rates, credit scores play a vital role," said Mr. Elias. "The findings of this survey clearly show that while education about credit scores is available, consumers today are still far from 'knowing the score'."