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Consumers misinformed about credit reports
Consumers understand little about their credit score
The FICO credit score is an important number that has tremendous influence on our lives. And yet, studies show that the public at large has little understanding of how this figure on their report affects them.
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Your credit score affects your life in more ways than you realize
.The credit score, created by Fair, Isaac and Co., is a distillation of a consumer’s entire financial life. Bankruptcies, judgments, bills paid late and on time, loans, credit card accounts and mortgages acquired or earned over a lifetime are reduced by a complicated formula down to a single three digit number. That number, ranging from 300 to 850, represents a borrower’s credit worthiness to a prospective lender, employer or landlord and usually accompanies a credit report. Recent studies show that the public is quite unaware of how a credit score works, or how deeply it affects their lives.
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Here are just a few of the things that a recent study by the General Accounting Office found:
- Only half of surveyed consumers realize that using credit cards or home equity lines of credit to their limit hurts their scores. In fact, a maxed out credit card can seriously affect a credit score. Advisors generally recommend that consumers keep their balance to less than half of their credit limit.
- An equal number were unaware that negative information on their credit report, such as bankruptcy or a loan default could remain on their credit reports for seven to ten years. A bankruptcy filing can stay on the report for ten years; other financial irregularities usually stay for seven.
- Only one third of respondents were aware that employers and insurance companies frequently use credit reports and scores to determine rates or eligibility for employment. In fact, many prospective employers regularly check reports in order to avoid hiring people with a history of financial problems.
- About half of the respondents think that a credit score can be increased by an increase in income. In fact, the score is simply a measure of ability to repay as agreed, and not a measure of earning capacity.
That this information is so widely misunderstood is rather frightening, as it is nearly impossible to function in today’s society without a healthy financial background. The ability to obtain a job, or insurance or a place to live is heavily dependent on a proven ability to pay bills on time, and a failure to understand that makes it difficult to borrow money.
As of September 1, 2005, everyone in the United States is eligible to receive a copy of their credit report for free. Anyone who would like to see just how comprehensive the information about them can be should get a copy. The only way to improve a bad score is to work harder to pay bills on time. The sooner one does that, the sooner one can get positive results.
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