When your parents sat you down for an important talk, did they ever say, “I want to talk to you about your credit scores”? I don’t think so. Everything you have learned about credit has come from the school of hard knocks, right!
People come to me to raise their credit scores from a 720 to a 780. Others need to recover from a severe financial crisis. Whatever the reason, all share the same problem-they do not understand their credit or how the credit scoring system works. In fact, most people who have high credit scores are completely clueless as to how they achieved that standard. That’s where their potential problems rest. They become incredibly vulnerable to an instant, devastating drop in their scores. A credit score of 750 can drop to a 620 in less than a minute. And on the other side, most who have low scores are misguided as to why their scores are low.
Consumers are held to a high standard of excellence and consistency in their credit history, but they are not provided with the “how to” manual about how to achieve this. This lack of available education and information has consumers convinced that reviewing their credit report will bring more frustration than stepping onto the bathroom scale the day after Thanksgiving. Meanwhile, creditors benefit to the tune of $28 billion a year from consumers’ lack of knowledge. Let me repeat, that’s $28 billion a year!
According to the latest credit score survey commissioned by the Consumer Federation of America (CFA) in 2008, consumers could save $28 billion a year in lower credit card finance charges if they improved credit scores by 30 points.(1)
The survey also found that only one-third of those surveyed even knew what a credit score was, let alone how it impacted their financial well-being. Here’s a breakdown:
- 31% understood the meaning of a credit score.
- A mere 47% knew that Experian, Equifax, and TransUnion are the three national credit bureaus.
- 72% believed that with credit scores under 700 they could get a low-cost mortgage.
- 29% thought a 400-500 score would qualify them for a low-cost mortgage.
- Only 45% realized that consumers have more than one score.
- 74% believed that scores were influenced by income (not true).
- 34% believed that the state where they lived and their ethnicity influenced their scores.
These statistics are disturbing enough; yet even these do not reflect my experience. After working with thousands of credit challenged consumers, I find that less than 15% of the individuals I speak with possess a basic understanding of the credit reporting system.
There are many functions in life that people can learn on their own because they are intuitive, like walking or riding a bike. Unfortunately, there’s nothing intuitive about the credit scoring system. Understanding how the credit scoring industry compiles your information will give you a better understanding of how information gets processed, as well as how mistakes happen.
Getting educated is key, and here some great resources to just that:
- http://www.ftc.gov (federal trade commission)