Most of us aren’t clueless about credit scores, but we may be making costly mistakes. A recent annual survey by Consumer Federation of America and VantageScore Solutions about consumer credit knowledge found that a “large majority of Americans know a great deal about credit scores.”
But it also identified some common misconceptions about credit that often trip people up. Here are three of them.
1. How Inquiries Really Work
When someone requests your credit report, or a credit score generated from your credit report data, an inquiry is created on that credit report. Multiple recent inquiries may cause your credit scores to drop. But there are different types of inquiries, and some don’t affect your scores at all.
According to the credit knowledge survey, only 7 percent of respondents knew that multiple inquiries will not lower one’s FICO or VantageScore credit score if those inquiries are made during a one- to two-week window.
In the case of FICO scores, inquiries from auto loan, mortgage or student loan applications are counted as a single inquiry if they occur in a two-week or 45-day period (the exact time period depends on which version of the FICO model is used). In the case of the VantageScore, there is a rolling two-week period in which any inquiry of a specific type is counted as one. (Unlike the FICO model, this one also applies to credit card-related inquiries). If you’re not confident you understand which types of inquiries impact your credit — or how they do — read this guide to credit report inquiries.
2. Who’s Looking at Your Credit Scores
In the credit knowledge survey, consumers were asked which of the following six types of businesses might use credit scores:
- Credit card issuer
- Mortgage lender
- Home insurer
- Cellphone company
- Electric utility
Only 18 percent of millennials, and 32 percent of older consumers, correctly identified the fact that all six of these businesses may check credit. While most consumers understand that credit card companies and mortgage lenders use credit scores, fewer understand that utility or cellphone companies may run credit checks, usually to determine whether prospective customers must pay a deposit. (Cable companies also check credit to decide whether to collect a deposit.)
3. The Money You Can Save With Good Credit
No doubt you’ve heard that a good credit score can save you money. But it’s easy to underestimate how large that amount can be.
The credit awareness survey asked this question: “On a $20,000, 60-month auto loan, about how much more would a borrower with a low credit score pay than a borrower with a high score? Would you say under $1,000, $1,000 - $3,000, $3,000 - $5,000, or more than $5,000?" Only 16 percent answered correctly: more than $5,000.
Why aren’t most people aware of the savings they can achieve if they build and maintain strong credit? It may partly be due to the fact that we often think in terms of monthly payments. Saving $50 a month on a mortgage payment may not seem like much, for example, but over the life of the loan (360 payments for a 30-year loan) that’s $18,000! In a recent article on the Credit.com blog, we demonstrated how much someone can save on a 30-year home loan of $200,000 if they have strong credit scores, and the difference ranged from $43,000 to $63,000!
How to Get Smarter About Credit
When it comes to credit, knowledge isn’t just power; it can also mean real savings. So check your free annual credit reports. The credit awareness survey found that those who have obtained their credit reports are more knowledgeable than those who haven’t. This guide will help you read your credit reports.
“Those who are interested in their credit reports are probably also interested in their credit scores,” noted CFA’s Brobeck. “It’s so easy to go online and get your free reports that this action likely motivates people to learn more about credit scores.” CFA and VantageScore offer an educational website, CreditScoreQuiz.org to help consumers test their knowledge and learn more.
Another way to learn more about your credit? Get your free credit scores. Consumers can get two free credit scores at Credit.com, where they will also get a clear explanation of the factors affecting their scores and an action plan for their credit.
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