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On Monday, the Consumer Federation of America (CFA) and VantageScore Solutions, LLC, released their 10th annual consumer credit survey.
As a highlight of the study, low-income households were revealed to be most likely to apply for credit in the next 12 months amid the recession and a global pandemic, yet consumers with lower incomes tend to know the least about credit scores.
The phone survey, which included 1,001 participants sampled from June 16-21, 2020, divided results between households with incomes below $25,000 and those with incomes of at least $75,000.
While consumers with low income consumers had the least understanding of credit scores, a large number of all consumers illustrated that they also couldn't answer some of the most basic credit concepts.
To help you see how your knowledge of credit stacks up against those surveyed by CFA and VantageScore Solutions, we took a look at five credit concepts that a vast number of people don't know.
According to the CFA and VantageScore Solutions survey, only 22% of consumers reported knowing that a low credit score borrower, when compared to a high credit score borrower, would likely pay over $5,000 in interest on a $20,000, 60-month car loan. With a low credit score, you are likely to only qualify for subprime auto loans whose annual interest rates often exceed 20%, the study says.
This is why a good credit score matters. Not only will your interest on credit cards be less than those with worse-off credit, but so will the interest you pay on loans. Having healthy credit can earn you a lower interest rate on new loans and make it easier to qualify for financial milestones in life, like a first apartment or a new car.
Only 33% of those surveyed said that they know a credit score measures the borrower's risk of not repaying a loan, while 14% thought it measures the borrower's knowledge or attitude toward consumer credit.
You could have a good attitude about credit, but still have a bad credit score. The point is that your score illustrates to lenders how you would use the credit they extend to you. If you're just beginning your credit journey, know that you need credit to build credit. In this case, consider applying to one of CNBC Select's picks for the top credit cards for building your credit, such as the Petal® 2 "Cash Back, No Fees" Visa® Credit Card, the Capital One Platinum Secured Credit Card and the Capital One Platinum Credit Card.
Once you start using your credit card, lenders and card issuers like to see that you can use credit responsibly, which means using less than 30% (at most) of your available credit and paying your monthly bills on time and in full.
Before you sign up for a credit repair service advertised to you, know what it will cost.
While over two-fifths (42%) of consumers surveyed may be right that credit repair companies are usually helpful in correcting any credit report errors or helping to improve one's credit score, these companies tend to charge relatively high fees to do what you could do on your own for free.
With 25% of Americans experiencing an error on their credit report, know that you can submit a dispute with the three credit bureaus online, by mail or by phone. We recommend disputing online or by mail so you have proof of your dispute.
4. Your age has nothing to do with your credit score, except for how long you've been borrowing credit
Nearly half (48%) of the survey respondents reported thinking that age is a factor used to calculate a credit score. The truth is that your age doesn't matter in calculating your credit score, only your use of credit matters.
In fact, the five components that make up your credit score include your payment history, amounts owed (utilization rate), length of credit history, new credit (how often you apply for and open new accounts) and credit mix (the variety of credit products you have).
To get a full view of your financial picture, you can pull your credit report for free on a weekly basis from each of the three major credit bureaus — Experian, Equifax and TransUnion — by going to AnnualCreditReport.com.
Your credit score is a good picture of how likely you are to pay your bills on time, but the survey found that only 50% of consumers know that an electric company can use credit scores to determine the amount of deposit you make.
This is another scenario where having healthy credit helps., but also know that paying your monthly utility bills on time can help your credit score, too. Through *Experian Boost®, you can connect your bank account for free so that your utility bill payments are added to your Experian credit file and you receive an updated FICO® Score delivered to you in real time.
Unless you have a perfect credit score, there is always room for improvement. The good news is that you don't have do jump through loopholes to get there and having an understanding of the basic credit score concepts can literally save you money in the long run. If you spend the time learning about credit early on, you won't need to spend more on high interest rates and larger down payments in the future.
To test your knowledge of credit scores, take the online credit score quiz that the CFA and VantageScore developed together at CreditScoreQuiz.org.
*Results may vary. Some may not see improved scores or approval odds. Not all lenders use Experian credit files, and not all lenders use scores impacted by Experian Boost.
Petal 2 Visa Credit Card issued by WebBank.