What do Americans know about Credit Score?
VantageScore Solutions and the CFA/Consumer Federation of America conduct the Annual Credit Score Survey every year. This survey indicates the level of knowledge that Americans have about the US credit system. The average credit score in the US touched a record level of 700 in 2017. This means that Americans may know a lot more about the credit system than is generally thought of.
The survey tested on the below listed credit process related topics:
- The method of calculating the credit scores
- The frequency of verifying the credit scores
- The top ways to raise the credit score or maintain a high credit score
The results of the 2018 survey indicate that Americans as a whole have high involvement and awareness in the process of credit score as compared to the years gone by.
The survey found out the following things about Americans and their understanding of the credit process:
- As compared to 2017, the number of people who checked their credit score for a minimum of 1 time increased to 57%, which was an increase of around 8 percent from that in 2014. Most of the people who checked their credit scores were likely to borrow funds; they also scored higher by 5 to 10 percentage points on questions in the survey as opposed to those people in the survey who were most likely to not borrow funds. This indicates that people who may be looking to borrow loans are more curious in their credit score because they understand the manner in which it affects their capacity to get approved for a loan.
- It was found that most of the participants in the survey were able to recognize the 3 main factors that affected the calculation of credit score, i.e., high balances on credit cards, missed payments, and personal bankruptcy.
- The participants also listed certain wrong factors which they believed also affected the calculation of the credit score, such as age, marital status, tax liens, civil judgments, and medical debt less than 6 months old. One of the major steps that people need to take towards increasing their credit scores is to completely understand the things that they are being reviewed on.
- The increased instances of mistakes on credit reports, the 2017 data breach at Equifax which exposed the information of over 140 million Americans, or possible borrowing of a loan in the near future should not be the only causes for regular maintenance of the credit report. The process of credit reporting involves the passage of information from consumers to lenders/creditors, to the credit bureaus. Error by humans in such reporting is expected and hence surveillance is of vital importance.
- Moreover, the survey showed that a large number of participants were able to identify specific methods to raise their credit score or keep it high. Over 70 percent stated that credit card balances should be kept below 25% of the credit limit; more than 85 percent said that timely repayments of loans was vital; and over 65% stated that simultaneous opening of multiple credit card accounts should be avoided.
- Even though the respondents were able to rightly recognize specific ways to raise their credit scores, more than 50 percent of them could not list all the 3 at the same time.
What are the takeaways from the survey?
The survey shows that Americans are increasingly invested and interested in the credit process as compared to previous years, particularly if they are looking to borrow funds. Listed below are some of the factors that have resulted in such an increased involvement by consumers in the credit process:
- Free access to credit reports: As per the Fair Credit Reporting Act, consumers have the right to get free access to their credit report, once every year, from each of the 3 majaor credit report bureaus, i.e., Experian, TransUnion, and Equifax. Thus, Americans can verify their score and immediately dispute any and all false information and erroneous reporting. Having access to 3 free annual checks of their credit scores can help Americans get increasingly acquainted and at ease with the credit system.
- Increased number of mistakes on credit reports: About 1 in every 5 credit reports has been found to have some mistakes. Due to such a high instance of errors, it is important to be on constant vigil to make sure that your credit stays in good health.
- Easy and simple access: The world is now driven by advanced digital technology. Consumers thus can check out millions of sources for information on credit. Such unlimited access to varied resources has been of great help to Americans in better comprehension of their credit reports and credit scores.
- There are many companies that provide free credit services: Currently, there are multiple firms that provide free estimation of credit scores and other credit related services. This has proved to be of great help to Americans in getting a better grip of the credit process. The estimations generally offer a basic clarification along with a theorized credit score, thereby allowing consumers to learn and gather additional knowledge.
Some of the main tenets involved in credit scoring and calculation are as follows:
- Credit utilization: Around 30% of the credit score is dependent on credit utilization. It determines the level of responsibility of a consumer with regards to usage of their credit. A good credit utilization score generally is considered to be less than or 30% of credit available.
- History of consumer payments: About 35% of the credit score is determined by the payment history. It indicates a consumer's capacity to make payments of all bills on time.
- Credit history period: The length of a consumer's credit history determines 15% of the credit score. The age of different accounts helps access the level of experience that consumers have in managing credit.
- New inquiries of credit: This indicates the number of times that a consumer has sought to borrow funds in the short term. It accounts for 10% of the credit score. It should be kept as low as possible.
- Mixture of accounts: It determines around 10% of the credit score. It is advisable to keep a balance between varied kinds of installment and revolving loans. Revolving accounts include store credit cards or credit cards, where the sum due is dependent on amount owed. Installment accounts refer to auto or mortgage loans, where the monthly payments remain the same.
Using only a minor part of the credit available, consistent timely loan repayments, regular credit report maintenance, paying off full debt rather than taking a loan or getting another credit card, and improving knowledge about the workings of the credit process are some of the best practices that consumers can adopt for achieving and maintaining a high credit score. A higher credit score offers consumers enhance powers of negotiation and lower rate of interest.