New Study: Americans Just Don’t Get Credit Scores

NEW YORK (MainStreet) – A new report out from the Consumer Federation of America leaves a big impression about the U.S. consumer, and it's not a pleasant one.

Americans, it seems, just don't know much about their credit scores - specifically, how they're calculated and what impacts them the most.

That’s not good news for tens of millions of Americans mired in debt. Bad credit can lead to more debt, as banks and lenders tack on extra fees and higher interest rates to extend credit to riskier consumers -- in other words, those with lower credit ratings.

To get an idea how deeply consumers are mired in debt take a look at these numbers:

• Total U.S. revolving debt (98% of which is credit card debt) = $801 billion, as of Dec. 2011, according to the Federal Reserve.
• Total U.S. consumer debt = $25 trillion, according to the Fed.
• U.S. credit card 30-day delinquency rate in Jan. 2012 = 2.93%.

With that much cash on the line, why is it that Americans have a tough time getting a grip on their credit scores?

In a new study released this week by the CFA (the Second Annual Survey of Consumer Knowledge About Credit Scores), year-to-year consumer understanding of credit scores are up slightly, but that’s the only piece of encouraging news from the report.

The CFA says that, by and large, U.S consumers . . . 

• Don’t know how costly low credit scores can be to the pocketbook.
• Don’t know that multiple credit inquiries can hurt their scores.
• Underestimate the risk of paying for, and working with, a credit repair service. For its part, the CFA views the study results through a “good news, bad news” prism.

"In the numerous consumer knowledge surveys we have undertaken over the past several decades, I have never seen such improvement from one year to the next," explains Stephen Brobeck, CFA's executive director, in a statement.  "However, credit reports and scores are so important to consumers that they should try to improve knowledge that remains deficient in several key areas.”

Consumers did show positive signs on credit knowledge in some areas, especially which service providers actually provided credit scores; the fact that consumers have more than one credit score; and how to raise their credit score. All were up moderately according to the survey.

But only 29% of consumers knew that, on a $20,000 auto loan, borrowers with low credit would pay $5,000 or more than a consumer with high credit over the life of the auto loan. Additionally, only 44% of survey respondents knew that credit scores were based on a person’s ability (or inability) to pay a loan or a bill, and that scores weren’t strictly measured by debt alone.

CFA calls that knowledge gap a “serious misunderstanding” on the part of American consumers. Left as is, consumers may find their lack of credit knowledge will end up hurting them where it hurts most -- in the bank account -- in an economy where money is tight, and consumers are tossing nickels around like manhole covers.