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What's a credit score? Consumers still not sure

More consumers are learning about credit scores, but there is still considerable confusion surrounding the three-digit number which largely determines a consumer’s borrowing power, a new survey has found.

More consumers are learning about credit scores, but there is still considerable confusion surrounding the three-digit number which largely determines a consumer’s borrowing power, a new survey has found. 

For example, three-quarters of Americans now believe they are entitled to a free peek at their credit score every year; they aren’t. Apparently consumers are confused about their new right to a free look at their credit reports, which doesn’t include access to credit scores. 

The survey, conducted in August, was sponsored by the Consumer Federation of America and credit card issuer Providian Financial Corp.

According to survey results released Tuesday, the number of consumers who had seen their credit score in the past 12 months was up sharply -- 31 percent said they’d obtained their credit scores in the past year, up from 24 percent in a survey conducted during 2004.

Credit scores and credit reports are different, but the survey suggests consumers are blurring the two.  Credit reports contain a consumer's entire financial past, listing payment histories for credit card accounts, car loans, mortgages, and other accounts. Any late payments and defaults are highlighted.

A credit score is a number generally ranging from 300-850 that's generated at a lender's request. The score, which is calculated through secret formulas that take into account items on the credit report and other factors, attempts to rate the likelihood a consumer will honor future debt payments.  The importance of credit scores has spiked in recent years, as many lenders now only look at credit scores -- skipping a chance to see the full report -- when making credit decisions.

That's why managing credit scores is critical, said Stephen Brobeck, executive director of the Consumer Federation of America. A poor credit score can cost consumers $1,800 per year in extra finance charges on a $150,000 mortgage, Brobeck said, citing estimates provided by scoring firm Fair Issac.  Warren Wilcox, a spokesman for Providian, said a 30 point-improvement in a credit score would save an average consumer $76 per year in credit card finance charges. If all consumers nationwide lifted their scores 30 points, the savings would be $16 billion, he said.

Poor scores can also impact a wide range of consumer activities. A low score can limit a person’s eligibility for home insurance, raise the price of auto insurance and even effect the outcome of a job interview. 

"The good news is consumer understanding of these scores has improved, in part because many consumers have obtained their scores," Brobeck said. "Unfortunately, most consumers still do not know basic facts about credit scores and their financial significance."

Many don't known why scores head south
For example, the survey found that fewer than half of consumers – only 47 percent – know that they have more than one credit score.  Each of the nation’s three credit bureaus uses a different formula to generate a score, and some lenders have their own.  Some lenders use only one score when determining loan eligibility, others average several scores.

Around half of consumers think that married couples have one credit score, when in fact each individual has their own score. And only 54 percent of consumers knew that "maxing out" a credit card would lower their credit score.

Credit score knowledge also breaks down among socio-economic lines, the study suggested.  About two-thirds of college graduates indicated they had seen their credit scores, but only 27 percent of those without a high school degree had.  Similarly, 7 in 10 U.S. residents with incomes of at least $75,000 had seen their scores, but only 4 in 10 of those with incomes below $25,000 had.

The survey had a margin of error of 3 percent.

Those with low credit scores are likely to find themselves in the “sub-prime” mortgage market, where interest rates can be 1 or 2 points higher, adding a sizable chunk to monthly home payments.  In one example listed on Fair Isaac’s Web site and cited by Brobeck, a consumer with a 30-year, fixed-rate $150,000 mortgage with a credit score over 760 would pay $844 per month, while a borrower with that same loan but a credit score below 620 would pay $998.

“The more consumers understand their credit scores, the more power they will have in managing their finances,” said Providian’s Wilcox.

Free reports, but not free scores
For years, credit reports and scores were shrouded in secrecy, as the companies that created them treated the information as a trade secret.  But beginning in the 1990s, the nation’s three credit bureaus -– Experian, Trans Union, and Equifax -– began marketing various products to consumers, including access to credit reports and scores.

The confusion over free access to credit scores apparently stems from implementation of the Fair and Accurate Transaction (FACT) Act, which authorized free credit reports to consumers when signed into law in late 2003. The law began to take effect last year, but only on Sept. 1 was free access to all U.S. residents granted.

Credit scores are not considered part of the credit report by the credit bureaus, so consumers must still pay to see the scores.

“People are confused about what the credit bureaus are doing in general,” said Liz Pulliam Weston, personal finance expert and author of Your Credit Score.  “But a lot of lenders make their decisions based solely on credit scores, not on credit reports, so many believe consumers should have the right to see the whole package (for free), including their credit scores.”

For now, Weston recommends consumers pay for access to the score, but there is also dispute over which credit score consumers are allowed to buy.  The three credit bureaus sell what are called “education” scores to consumers. The scores are generated using slightly different formulas than what’s used to generate the score sold to lenders. The difference can be significant, Weston said.

“I’ve had mortgage brokers tell me the difference is 30 to 80 points,” she said.  She recommends consumers buy their scores directly from credit score formula firm Fair Issac at, because Fair Issac’s FICO score is still the most popular among lenders, she said.

Tips to raise scores
Brobeck said consumers have a lot of control over their score, and by following simple steps, they will likely save money when borrowing money.  For example, credit score formulas heavily weigh “credit utilization,” or the amount of available credit a consumer is using at any given time.  In other words, a consumer with a credit limit of $4,000 and a balance at or near that amount is penalized on their credit score for using most of their available credit.

Brobeck recommended keeping balances at no more than 50 percent of available credit limits.

Other credit score tips:

  • Pay bills consistently and on time
  • Pay off debt rather than just moving it around
  • Don’t open new accounts rapidly
  • Check credit reports, which are now free, to make sure they are error-free
  • Consumers who have missed payments in the past should pay up, and make sure all accounts are “current”

Improved scores will produce significant savings, particularly for consumers planning to buy a house in the next year or two, Brobeck said. Credit scores range from 300-850.  Scores above 700 generally earn consumers a bank’s best rate; those with lower scores risk paying more to borrow money.

“If your score is 650 or lower, you could save you tens of thousands of dollars if you work hard to raise your credit score,” he said.

More information about how a credit score is formulated is available at the Consumer Federation of America Web site.

Bob Sullivan is author of Your Evil Twin: Behind the Identity Theft Epidemic.