Key factors about credit scores continue to be widely misunderstood, and the misconceptions are potentially costing consumers tens of thousands of dollars, according to a conference held today by the Consumer Federation of America and VantageScore Solutions, a FICO competitor.
“People who fail to understand exactly what can impact their score have little incentive to manage the things that can truly make a difference,” said Barrett Burns, president and chief executive of VantageScore Solutions.
Today FICO released data showing just how malleable credit scores are. For consumers with FICO scores of 750-799 in October 2011, a year later, 21% of them had moved into the 800-850 score range (850 is the top FICO score); 58% stayed in the same range; and 21% moved to a lower score range.
Here’s what you need to know to keep your score up.
If you co-sign a student loan for a child, your score is likely to decrease. Then it will improve if your child makes payments on time. Just one missed payment—even if it’s 10 years later—will impact your score. Defaults can be “devastating” to a consumer’s credit profile. Statistics show only one –third of those surveyed know about all of these consequences of co-signing a student loan.
Shopping for a mortgage or car loan.
More than a third of folks surveyed thought that each time a lender makes an inquiry re your credit score, it can lower your score. But multiple inquiries relating to a mortgage or auto loan won’t lower your credit score if bunched into a one to two week window. The multiple inquiries are counted once to make sure rate shopping isn’t penalized. This is important because consumers who believe inquiries will lower scores will be less likely to shop around for loans and that can cost them an additional tens of thousands of dollars in interest costs. On the other hand, applying for a lot of store credit cards would raise a red flag,and could potentially lower your credit score.
Age and Marital Status.
Two-fifths of folks incorrectly believe that age and marital status can impact their credit scores. Ethnicity, religion, and geographic location also don’t affect your score. A credit score measures the risk that you won’t pay back a loan. What impacts your score? High balances on credit cards, personal bankruptcy, missed payments and taking out unnecessary loans.
The cost of a low score.
On a $20,000, 60-month auto loan, a borrower with a low credit score would typically pay more $5,000 more than a borrower with a high score. Only one out of five folks got this one right.
Raising your credit score.
The good news is that 58% of folks know how to raise their credit score by taking action. Pay your bills on time every month. Don’t max out—or come close to maxing out—credit card limits (try to keep any balance under 25% of the credit limit). Pay down debt rather than just moving it around. Don’t open multiple new credit accounts. And finally, check your credit reports to see that they are error-free either online at www.annualcreditreport.com or by calling 1-877-322-8228.