A new report from Visa, a global credit card company, shows that most Americans don’t really understand how their credit score is compiled, and that many don’t really keep track of it anyway, which can cause some borrowers to pay much higher interest on auto financing deals and other large credit-based purchases. An October 10 announcement from Visa shows some of the results of a survey where the company conducted over 1000 interviews in September to assess what Americans think about what may go into the credit score that is so important in lending, and now even in other areas like housing and employment.
What Visa found is that Americans have some fundamental misconceptions about what a credit score reflects. Almost 60% of respondents thought that employment history factors into a credit score, while nearly 40% thought that age is a factor. Other demographics like gender also struck some respondents as ways that credit agencies might set credit scores: nearly 20% indicated that they thought whether a person is male or female can affect their FICO or overall credit score.
In reality, credit scores are based on a pretty limited set of calculations, the vast majority of them related to actual debt and debt payment history. There are a range of major credit score events, such as foreclosures and bankruptcy, and then smaller ones, such as opening up new lines of credit or even a large number of credit score inquiries, which can alter a person’s credit score in the short-term. Many Americans are probably so confused about FICO scores because the process is not that transparent. It can also be hard to get an accurate report, since three different credit agencies contributed to a citizen’s overall credit score. Add the number of deceptive “free credit score report” companies operating across the U.S., and you have what’s basically a recipe for mass confusion. According to Visa, the best way to improve a credit score is “to pay bills on time.” Most of those surveyed probably knew that, but in actuality, there’s a lot more to managing credit than just paying bills on time. People need to know where they stand when they go to apply for auto loans or other kinds of lending, and that means knowing the borrower’s credit score, and checking for whether past judgments or even clerical errors on a report are contributing to a lower overall score.
Knowing your credit score and other information can help swing financing agreements in your favor. Next time you are setting out to look for an auto loan, or making some other large purchase, make sure you know your score and what’s behind it in order to get the best interest rates available and keep your debt at affordable levels.