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Not understanding credit scores can cost you, survey says

Jeremy Simon

Consumers remain largely uneducated about credit scoring. That’s unfortunate, since a new survey suggests that by informing themselves and taking a few easy steps, borrowers could save billions of dollars each year.

According to the latest credit score survey commissioned by the Consumer Federation of America and Washington Mutual, less than one third of Americans are aware that credit scores indicate risk of not repaying a loan.

“Lack of consumer knowledge about credit scores not only increases the costs of their credit and insurance but also reduces the availability of these and other services,” CFA Executive Director Stephen Brobeck says via press release.

Educating themselves about credit scores and making use of that knowledge could result in sizable savings for borrowers. “By taking a few simple steps, American consumers have the power to reduce their collective credit costs by billions of dollars annually,” says Washington Mutual Card Services President Anthony Vuoto. Since a higher credit score means lower interest rates, WaMu estimates that U.S. consumers could trim $105 in annual credit card finance charges by raising their credit score 30 points. Collectively, that would result in total estimated annual savings of $28 billion. WaMu’s calculation is based on data supplied by Argus Information and Advisory Services.

The CFA and WaMu survey revealed numerous gaps in consumers’ awareness of credit scores. “Many Americans fail to understand that one’s credit score reflects only how they use credit, not factors such as income and age,” the press release says. Additionally, while 78 percent of survey respondents understand that their credit score can suffer if they make a monthly payment more than 30 days late, just 59 percent realize that maxing out their credit card also lowers their credit score.

The Consumer Federation of America and Washington Mutual highlight what they believe to be the most important information about credit scores:

  • Scores reflect only one’s past credit history, not personal characteristics, such as age, gender or level of income. Over time, consumers have the ability to raise their scores.
  • Low scores could not only cost individual consumers thousands of dollars a year in additional finance charges, but can also deny access to credit, insurance, telephone service, a rental unit and even a job.
  • Consumers with credit scores below 600 are almost always charged relatively high “subprime” loan rates, while those with scores above 700 are often charged relatively low “prime” rates, while those with scores above 760 are generally charged the lowest rates.

I’d say those are some solid reasons to take action in order to improve your credit score.

Still, some aspects of credit scoring could be beyond the borrower’s control. “Credit card issuers, including banks such as WaMu, have recently cut limits on many cards as financial institutions seek to reduce their credit risks. That can hurt credit scores because they are based partly on the amount a consumer has on a card compared to its overall limit,” the Associated Press reports. The lowering of credit limits has been confirmed by data from the Federal Reserve.

As they focus on education and credit score improvement, that’s an issue consumers need to be aware of.

See related: Understanding how credit scores work, Credit card issuers increasingly tighten standards, Fed says

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My blog “Gas station owners challenge credit card fees” was accepted into the Finance Fiesta: No Debt Plan Edition. Thanks for the inclusion, No Debt Plan!

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