WASHINGTON – For consumers who feel clueless about credit scores,a new survey confirms they are not alone.
Roughly half of Americans polled in a survey last month did not understand that a credit score is a measure of credit risk,the Consumer Federation of America announced Tuesday. Forty-nine percent mistakenly believe that credit scores reflect credit availability,debt levels or credit IQ.
While nearly all of the 1,013 people surveyed knew that paying off debt improves one's credit score,more than 40 percent thought that an increased income will do the same. In reality,it has only an indirect influence on the score,said Steven Brobeck,CFA executive director.
“Most basically,it's your willingness and ability to pay off debts on time,” he said.
The FICO is the most widely used credit score. Developed by the Fair Isaac Corporation, scores range from 300 to 850. A score above 700 indicates relatively low risk,while a score below 600 indicates a higher risk. Creditors,lenders and other companies use the score to determine whether a person should be granted a loan and at what interest rate.
Brobeck said that credit scores have become more sophisticated and widely relied upon by creditors in just the last few years,but many consumers are still unaware of how their credit scores affect them.
“It's a combination of the fact that it's a relatively new phenomenon,and it's somewhat of an abstract concept,” he said.
The CFA,which commissioned the Opinion Research Corporation to conduct the telephone survey last month,also announced Tuesday the release of a free brochure entitled “Your Credit Scores,” created in partnership with Fair Isaac and the Federal Citizen Information Center. The brochure aims to be a straightforward,easy-to-understand primer on credit scores.
It offers illustrations on how a credit score can affect loans. For example,a score of 580 would likely lead to a 8.5 percent interest rate on a mortgage,while a score of 720 would earn a 5.5 percent rate. Over a 30-year,$100,000 fixed-rate loan,the difference in interest paid would be $72,000.
Brobeck and Cheri St. John,Fair Isaac vice president,offered simple tips to improve one's score.
“Always pay bills on time,” Brobeck said. “If you pay by one week late,you think it's trivial. It's not trivial. Going over your credit limits,or making late payments will kill your score.”
St. John said consumers often mistakenly believe that closing a credit card and shifting the balance to another will help
“In some cases,closing down credit cards can actually consolidate balances and make consumers look closer to their limits on a couple of cards than if they actually managed their credit responsibility,” she said.
She also recommended keeping credit card balances below 50 percent of the credit limit.
On March 1,federal legislation went into effect in Midwestern states that allows consumers to obtain free copies of their credit reports once a year. This has been available to western states since December,and Southern and Eastern states will be phased in on June 1 and Sept. 1.
The report does not include a credit score,but it lists vital information creditors use to track a person's credit history. A fee is required to obtain one's FICO credit score,but it also comes with a report detailing the top four factors that determined the score. St. John said obtaining the score is worthwhile.
“It's an important first step for consumers to check their reports for accuracy at each of the three (credit reporting) bureaus,” St. John said. “It's really the score that tells them how creditors view them.”
Depending on how much information a consumer wants,FICO reports cost from $15 to $50,according to Fair Isaac's Web site.
Consumers can request a free copy of “Your Credit Scores” at http://www.pueblo.gsa.gov and a free credit report at http://www.annualcreditreport.com.