Your credit score is an important piece of your financial health. Represented as a number between 300 and 850, it signifies your trustworthiness to financial institutions and helps determine the interest rates you receive on loans, such as a mortgage.
But according to a new survey from LendEDU, 25 percent of millennials can't identify what it is. When LendEDU polled 500 people between the ages of 17 and 37 on their knowledge of credit scores, 74.35 percent accurately identified the correct definition, but 10 percent believe that it's a number assigned at birth by financial institutions, another 10 percent think it comes from the government as a way to track banks and a final five percent believe it's a waiting list for credit cards.
Although the majority of millennials know what a credit score is, few seem to understand how to improve theirs.
The numbers are startling: 43.69 percent believe they can improve their credit score by increasing their credit utilization, which is a ratio of how much you've spent on your credit card versus the card's limit; 36.27 percent believe they can improve their score by maxing out their credit cards then paying them back on time; and 4.81 percent say they'd rather have a low credit score.
In addition to paying your bills in full and on time, one of the biggest ways you can improve your credit score is by actually decreasing your credit utilization ratio, a fact only 17.23 percent of respondents got right. The higher the balance you carry on your cards, the riskier you become to lending agencies. But if you keep these balances low, you become less of a risk.
That doesn't mean you shouldn't use your credit card for major purchases in fear of raising your credit score. Rather, focus on monitoring your spending, paying off your balance in full every month — sometimes multiple times per month if you've made any large purchases — and using under 30 percent of your available credit.
Another misunderstood factor that influences credit scores is hard credit inquiries. Too many hard inquiries, such as applying for an apartment or signing up for a new credit card, can impact your score negatively, while soft inquiries, such as background checks, do not. While the majority of respondents — 56.71 percent — understand that soft credit pulls have no bearing on credit scores, more than 43 percent think they do.
These discrepancies in financial literacy, particularly on the topic of credit scores, speak to the need for everyone to educate themselves and take control of their own money. As LendEDU points out, "only through having a thorough understanding of how credit scores are calculated will consumers be able to successfully build up their scores."
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