Survey Reveals Poor Understanding of Credit

MBA (7/11/2008 ) Palaparty, Vijay
Consumer understanding of credit scores improved since last year but still remains poor, according to a survey from the Consumer Federation of America and WaMu, Seattle. Only 31 percent of survey respondents know that credit scores indicate risk of not repaying a loan.
“Lack of consumer knowledge about credit scores not only increases the costs of credit and insurance, but also reduces the availability of these and other services,” said Stephen Brobeck, executive director of CFA. “However, an increasing percentage of Americans understand factors about credit scores.”

Twenty-eight percent of respondents said they know that 700 is the approximate lowest credit score required to obtain a low-rate mortgage, up 4 percent from last year’s 24 percent. However, 26 percent of respondents, compared to 19 percent last year, said a credit score range of 400 to 500 (incorrect) would qualify for a low-rate mortgage.

“The news is more bad than good,” Brobeck said. “Few seem to know that credit scores affect credit risk, which affects costs of mortgage, auto and other loans. Also, many Americans fail to understand that credit score reflects only how they use credit and not factors such as income or age.”

Seventy-four percent of respondents thought income affects credit scores and 40 percent said age is a factor. Other factors respondents believed would affect credit scores include marital status, 38 percent; state of residence, 29 percent; level of education, 29 percent; and ethnicity, 15 percent.

More respondents, however, understood that they could obtain their credit scores if they were denied a mortgage or a credit card; 72 percent and 65 percent, respectively.

“The improvement of consumer knowledge of some credit score issues may largely reflect the fact that more Americans have obtained their credit score in the past two years—up to 49 percent in 2008 from 42 percent last year,” Brobeck said. “Those who obtain their scores know more about credit scores than those who have not.”

Thirty-five percent of respondents who obtained a credit score knew that the approximate score to qualify for a low-rate mortgage is 700 versus 16 percent of those who did not obtain their credit score. Additionally, the gap between those who obtained and did not obtain their credit score, who consider their knowledge of credit scores to be excellent or good, was wide—67 percent to 26 percent, the survey revealed.

“It's worrisome because knowledge levels for both are low, and those who think they know something, but don’t, may make poorer decisions than those who know they don’t know something,” Brobeck said.

“By taking a few simple steps, American consumers have the power to reduce their collective credit costs by billions of dollars annually,” said Anthony Vuoto, president of WaMu Card Services.

Vuoto said consumers collectively could save $28 billion a year in lower credit card finance charges if they improved their credit scores by 30 points. “Consumers have shown some improvement but there is a long way to go,” he said.