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Study: Consumers Lack Understanding of Credit Scores

September 15, 2005
Despite the fact that 65.1 percent of Americans consider themselves "very" or "highly" knowledgeable when it comes to personal finance, many fall short in a number of key areas according to the results of a new survey by consumer advocacy group Consumer Action and Capital One.

The survey found that:

• A majority of Americans surveyed either did not know (31.7 percent) or responded incorrectly (35.1 percent) when asked to define a good credit score (700).

• Fifty-four (54) percent of those surveyed wrongly stated that age is a factor considered in determining credit scores.

• A majority of Americans (52 percent) do not regularly review their credit report each year. Twenty-three percent of Americans have never reviewed their credit report.

• More than one-third (36.1 percent) of Americans report that they do not use a budget to manage their family's expenses.

According to the results, America's IQ on personal finance also varies greatly with age.

• Younger Americans are more inclined to use a budget compared to older Americans. Nearly 80 percent (79.7) of 18-19 year olds use a budget, compared to only 46.6 percent of Americans aged 70+ (plus).

• Older Americans have a poorer understanding of credit scores compared to younger Americans. Only 13.6 percent of 70+ Americans correctly identified 700 as a "good" score. By comparison, more than 43 percent of Americans in their thirties were able to correctly identify 700 as a good credit score.

The survey polled 1002 men and women nationwide ranging in age from 18 to older than 70. It gauged respondents' knowledge of the basics of personal finance such as budgeting, saving habits, credit principles, and basic personal finance responsibilities.

Credit Scores

Older Americans, however, are not the only ones who do not understand credit scores. The survey's most critical findings show that an overwhelming number of Americans lack basic knowledge about the many factors that impact credit scores and most consumers are not aware that they can request a copy of their credit report much less that they can receive one for free.

The Consumer Action-Capital One survey also found that two-thirds of Americans don't understand the numeric value associated with a good credit score. More than one out of five (22.3 percent) Americans incorrectly defined a "good" credit score as a value of 1200 and 32 percent of all respondents did not know what a good credit score was at all.

"Given the growing importance and influence of credit scores on purchasing decisions, it's startling that the majority of Americans do not understand what constitutes a good credit score," said Ken McEldowney, Executive Director of Consumer Action.

Consumer Action offered this basic information to help consumers learn about credit scoring.

• A credit score is a three-digit number (generally ranging from 300 to 850).

• The higher your credit score, the better credit risk lenders view you and your financial assets (the information helps lenders predict how risky it is to lend money to you).

• The credit scoring process is complex. Fair Isaac uses a variety of factors to determine a score, including a consumer's payment history, the amount of debt currently owed, and the length of credit history, just to name a few.

Identity Theft

The survey found that Americans aren't taking a crucial step in preventing credit card fraud and identity theft by obtaining a copy of their credit report. Experts agree that checking your credit report for errors is the best line of protection against these and other growing crimes such as phishing and skimming.

Yet, the study findings show that almost two-thirds of the people surveyed said they rarely or never received their credit report. Only 35 percent of people polled reported that they check their credit report the recommended once a year.

"Obtaining a credit report is simple and easy and can be done in a matter of minutes by phone or online," stated Director of Financial Education at Capital One, Diana Don Colby. Yet, many still neglect to take this simple step to protect their credit and their finances," Don Colby added.

As of Sept. 1, all consumers can get free copies of their credit report.

An amendment to the federal Fair and Accurate Credit Transactions Act passed in 2004 now allows consumers to receive one free credit report every year from each of the three major credit reporting agencies. Consumers can request their reports online at http://www.annualcreditreport.com, which is the only on-line, authorized source for consumers to access their annual credit report online for free. The reports can also be ordered for free by calling 877-322-8228.

Consumer Action and Capital One offer these tips consumers can use to obtain and better-understand their credit reports.

• Credit reports can be requested by contacting any of the three major credit bureaus: Equifax, Experian and/or TransUnion.

• A credit report is the equivalent of a consumer's financial report card. Your report details your credit history as it has been reported to the credit reporting agency by lenders who have extended credit to you. Your credit report lists what types of credit you use, the length of time your accounts have been open, and whether you've paid your bills on time.

• Correcting mistakes on a credit report in order to repair an undesirable credit score takes time. It's your responsibility to correct mistakes that may appear in your credit report. To do this, consumers must regularly obtain copies of their credit report, and contact each of the three major credit reporting bureaus to correct any misinformation.

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