Understanding Credit and Credit Scores

July 5, 2012

By Dylan Tansy, America Saves Intern

credithistoryLast week, TIME released an article detailing 7 commonly believed myths concerning credit. They point out the even though everybody knows the importance of earning “good credit” in order to obtain lower interest home mortgages, car loans, and credit cards, recent surveys have indicated that many Americans simply do not understand what goes into their credit scores or how to maintain a good credit rating. Some, wrongfully, think it’s necessary to hold a balance on their credit card to get a higher score or simply don’t know the impact of checking their credit. Even people who consider themselves financially savvy or who do a fine job managing their own household budgets can be misinformed. Consider the myths that TIME points out:

  • Myth  - Checking your credit information hurts your score. Many people believe that because checking your credit scores appears on your credit reports that it somehow has a negative impact. While an inquiry from an outside lender may drop you a few points, checking your own scores actually has a positive effect. Obtaining a credit report is a maintenance activity that should be done about once a year, and allows you to ensure no agency has incorrect information that will be a hassle to deal with when it comes time to obtain a loan. The three credit bureaus do not have identical information and mistakes do happen so check your credit reports regularly. You can obtain a free year credit report at www.annualcreditreport.com/
  • Myth - Getting turned down for a credit card hurts your score. While applying for too many credit cards and loans may be taken as a sign of financial insecurity and lower your score, the lender’s decision to deny credit is not present on your credit report and has no bearing on your credit score.
  • Myth -Your credit report includes your credit score. In fact, your credit report reflects your credit activity while your credit score is a statistical analysis of your credit activity. Currently when you request to see your credit report, you will not have access to the score.
  • Myth -Debit cards can help your credit. Simply put, checking and savings accounts have no impact whatsoever on your credit history, and therefore credit score.
  • Myth - “Credit repair” companies can erase credit report blemishes. The most any advertised credit repair company can do is send in dispute requests which you can do for free on your own. This will cause the information to be temporarily removed while it is disputed, but it will always go back once the information is verified. If a late payment was an anomaly and you have a generally reliable history, often times you can simply call in and request that the one dark spot be removed.
  • Myth - Any action is worth a set number of points. It is simply not true that a bankruptcy, late payment, or a repossession has a set score penalty. Credit scores depend on many factors including how high or low your credit score was to begin with, age of the delinquency, and many other small pieces of information for instance.

Fortunately, a recent Consumer Federation of America survey concerning credit score knowledge discovered that consumer knowledge has vastly improved in the last year alone. More people have started getting yearly credit reports, and those who had, showed significantly greater knowledge about every aspect of credit. However, the CFA did discover that many are still lacking important knowledge:

  • Few know how costly low scores can be.  Only 29 percent are aware that, on a $20,000, 60-month auto loan, a borrower with a low credit score is likely to pay at least $5000 more than a borrower with a high credit score.
  • Fewer than half (44%) understand that a credit score typically measures risk of not repaying loans rather than amount of debt (22%), financial resources (21%), or other factors.
  • Over half still think, incorrectly, that a person's age (56%) and marital status (54%) are factors used to calculate credit scores, and 21 percent incorrectly believe that ethnic origin is a factor.
  • Very few understand when one’s credit score is potentially harmed by multiple inquiries while getting a loan.  Only 9 percent correctly know that multiple inquiries during a 1-2 week window will not lower FICO scores or VantageScore credit scores.  But 34 percent incorrectly believe that each inquiry lowers one's scores.
  • Over half (51%) incorrectly believe that credit repair companies are "always" or "usually" helpful in correcting credit report errors and improving scores.  Experts agree that credit repair companies often overpromise, charge high prices, and perform services that consumers could do themselves.

Credit is extremely important to Americans today. If you are struggling with debt or credit, it is time to come up with a plan and start saving. America Saves is devoted to helping Americans in financial need. We know that everyone can start saving and start getting out of debt. Join America Saves and start saving today.

For more information about credit, check out these helpful resources:

The Credit Score Quiz

The Importance of Credit History and Successful Saving - Packet

Is it Time for a Financial Tune-up?

Annual Credit Score Knowledge Survey Reveals Considerable Improvement and Costly Misunderstandings

Successful Savings and Your Credit History

Lowering Debt Can Raise Your Credit Score

7 Ways to Boost Your Credit Score

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