CFA: Consumers' Understanding of Credit Scores Improved But Still Insufficient
WASHINGTON - First the good news: consumers' understanding of and access to credit scores has improved since last year. Now the not-so-good news: there's still room for more improvement. That's the assessment of the Consumer Federation of America and Providian Financial who discussed the findings of their second annual consumer...
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WASHINGTON – First the good news: consumers’ understanding of and access to credit scores has improved since last year. Now the not-so-good news: there’s still room for more improvement. That’s the assessment of the Consumer Federation of America and Providian Financial who discussed the findings of their second annual consumer credit score survey on Sept. 20. While consumer understanding of credit scores has improved, CFA Executive Director Stephen Brobeck said, “Unfortunately, most consumers still do not know basic facts about credit scores and their financial significance.” Nor do they realize how much they could save by improving their score. “If consumers were to raise their credit scores by only 30 points, on average, they would save $16 billion on lower credit card finance charges alone,” said Providian’s J. Christopher Lewis, chief public policy officer. CFA and Providian offered this example to stress their point: In the mortgage area, on Fair Isaac’s Web site, on a $150,000, 30-year, fixed rate mortgage, consumers with credit scores over 760 will be charged a 5.42% rate with monthly payments of $844, while consumers with credit scores below 620 will be charged a 7.0% rate with monthly payments of $998 – an annual difference of $1,848. Consumers’ ability to receive free copies of their credit scores has increased their understanding of the information and how it’s used. The report findings showed that in the past year, there was “significant improvement” in consumer understanding of what influences credit scores and who uses them: * the proportion of consumers who understand that making payments on time influences credit scores rose from 87% in 2004 to 93% in 2005. In addition, the proportion of consumers who know that maxing out a credit card influences scores increased from 66% to 77%. * the proportion who understand that various lenders and other service providers use credit scores to price and make products available also increased – from 81% to 91% for mortgage lenders; 77% to 86% for credit card lenders; 50%-58% for cell phone companies; and 47% to 57% for home insurers. Despite these encouraging numbers, the survey data show that more than three-quarters of consumers mistakenly believe that they have the right to obtain their credit score for free once a year. “Clearly many consumers think that their right to a free credit report extends to credit scores as well. Unless consumers apply for a mortgage loan or obtain our credit card, they must purchase their scores for a small fee,” stated Lewis. Consumers though are also confused about critical characteristics of their credit score. For example: * Only 27% understand that scores measure credit risk, not credit knowledge, amount or attitude. Less than half understand that people have more than one score – one from each of the three major credit bureaus and other scores as well. * Only 23% know the identity of the three major credit bureaus. In analyzing differences among various demographic groups defined by gender, age, ethnicity and region among other factors, income and education stand out as the two factors that are associated with differences in understanding of credit scores and a consumer’s knowledge about their own score. For example, nearly 64% of college graduates, but only 27% of those without a high school degree, have obtained their credit scores. And more than two-thirds of those with incomes of at least $75,000, but only two-fifths of those with incomes below $25,000, have obtained their scores. CFA and Providian stressed that “all consumers should know important facts about credit scores. Scores reflect only one’s own past credit history, not personal characteristics such as age or gender or income level. Over time consumers have the ability to control these scores.” -
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