How Many Americans Understand Credit?

Every year, the Consumer Federation of America (CFA) and VantageScore Solutions work together to produce the Annual Credit Score Survey. This survey examines how much Americans actually know about the credit system. With the average credit score reaching a record high of 700 last year, Americans might know a lot more than we think.

The survey tested over 1,000 adults on topics related to the overall credit process. These subjects include:

frequency of checking credit scores
how credit scores are calculated, and
best ways to increase your credit score or keep it high

The 2018 results showed that on the whole, Americans have increased knowledge and participation in the credit score process compared to previous years. Let’s break down the results into three key findings.

Obtaining their credit scores

Finding

The number of individuals who sought out their credit score at least once in the last year rose to 57 percent – an eight percent increase from 2014. The majority of these individuals were potential borrowers, who scored five to ten percentage points higher on survey questions compared to non-borrower surveyees. This suggests that potential loanees are more interested in credit scoring because they are aware of the how it impacts their ability to secure a loan.

Room for improvement

With the 2017 Equifax data breach that exposed approximately 143 million Americans information or the high frequency of errors on credits report, borrowing shouldn’t be the only motivation for regular upkeep. The credit process is like a game of telephone, with information being passed from consumer to lender to credit bureau. Since human error is inevitable, surveillance is key.

How credit scores are calculated

Finding

The Consumer Federation of America found that majority of respondents were able to identify three key factors in how credit scores are calculated: missed payments, high credit card balances, and personal bankruptcy.

Room for improvement

The respondents listed some incorrect items that they thought were also calculated into a credit score, including marital status, age, tax liens, medical debt under six months old, and civil judgments. A key step towards raising your credit score is to fully understand what you’re being assessed on.

How to increase your credit score or keep it high

Finding

This survey also found that the majority of respondents were able to recognize specific ways to either increase or keep your credit score high: 86 percent said to make all loan payments on time, 72 percent said to keep credit cards balances under 25 percent of the credit limit, and 66 percent said by avoiding opening several credit card accounts at the same time.

Room for improvement

Despite being able to correctly identify individual methods to increase their credit score, almost half of all respondents couldn’t identify all three together. Following all score-boosting tactics simultaneously will create better results than performing simply one.

Takeaways

The findings from the 8th Annual Credit Score Survey suggest that Americans are more curious and invested in the credit process than ever before, especially if they are in a life stage that requires borrowing. What has caused this spike in interest? Let’s take a look at a few possible explanations.

High amount of errors on credit reports – As mentioned earlier, approximately one in five credit reports have an error. With this commonality, continuous surveillance is needed to ensure you’re not just another statistic.

Free access to reports – Under the Fair Credit Reporting Act, you are entitled to one free credit report a year from each of the three main credit bureaus: Equifax, Experian, and TransUnion. This gives Americans the opportunity to check their score and dispute any errors immediately. Taking advantage of the three free annual credit checks can help consumers become more familiar and more comfortable with the credit process.

Companies are offering free services – More and more companies are offering a free credit score estimation. This gives Americans additional hands on access to their scores. These estimations will typically provide a basic explanation to accompany the projected credit score, allowing for an additional teaching moment for the consumer.

Ease of access at your fingertips – In a digitally-driven world, consumers have access to millions of online resources regarding credit. This portal of unlimited resources has greatly helped Americans better understand their credit scores.

Credit Scoring 101

In preparation for the next annual survey on consumer understanding of credit scores, let’s review some core features about credit scoring.

How credit scores are actually calculated

Payment History – This accounts for 35 percent of your overall credit score and looks at your ability to make all payments on time.
Credit Utilization – This accounts for 30 percent of your credit score and measures how responsible you are with your credit usage. A healthy credit utilization score would be 30 percent of available credit or less.
Length of Credit History – Accounting for 15 percent of your credit score, this looks at how much experience you have handling credit by observing the age of your accounts.
Mix of Accounts – This makes up 10 percent of your credit score. It’s recommended to have a balance in types of loans between revolving and installment. Installment accounts are mortgage or auto loans on which you pay the same amount every month. Revolving accounts can be found with credit cards or store credit cards, where the amount due varies according to how much you owe.
New Credit Inquiries – Accounting for 10 percent of your credit score, this tallies the number of times you requested a loan in the short term. It’s best to keep this number as minimal as possible.

Methods to boost your credit score or keep it high

According to the Consumer Federation of America, there are best practices you should adopt in order to achieve a high credit score. These recommendations include making consistent loan payments on time, only using up a small portion of your available credit, paying off debt instead of obtaining another credit card or asking for a loan, regular upkeep of your credit report, and increasing your knowledge of how credit scoring works.

Your credit score is your financial reputation. With a higher score you can benefit from lower interest rates and more bargaining power. This year’s 2018 Credit Score Survey showed promising results in American’s credit awareness. By finding value in a higher credit score, consumers are more invested in not only learning more, but participating more, in the credit scoring process. Sign up for your free Credit.com account today to see two of your credit scores.

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