Originally created 09/22/04

Consumers don't understand credit scores



NEW YORK - Americans are woefully ignorant about credit scores, a consumer group found, even though these measures of credit risk affect everything from the interest people pay on mortgages to whether they qualify for insurance.

The Consumer Federation of America said Tuesday that a survey of more than 1,000 Americans found that only one-third correctly understand that credit scores indicate the risk of not repaying a loan. More than half incorrectly believe a married couple has a joint credit score.

"Now that credit scores are increasingly used by utilities, insurers and employers, as well as creditors, it is essential for consumers to learn their score and what it means," said Stephen Brobeck, the executive director of the federation, a nonprofit advocacy group based in Washington, D.C.

"The cost of not knowing your score and its significance could be not only denial of credit but also difficulty obtaining needed services and even a job."

Credit scores are derived from reports kept by major credit agencies, including Experian, Equifax and TransUnion. These agencies track the amount of debt consumers have taken on and whether they pay their bills on time.

The higher a consumer's score, the more likely he or she will qualify for a good interest rate on credit cards and mortgages.

These scores are increasingly being used for other purposes, such as evaluating potential tenants, setting deposits for utilities and determining the rate on auto insurance policies.

The survey found that a majority of Americans don't know credit scores are being used for purposes beyond borrowing. And it found that many don't know how to improve their scores.

Alan Elias, a senior vice president with Providian Financial Corp., a San Francisco-based credit card company, said "the single most important way to protect your score is ensuring that payments arrive on time each month."

Having a low credit score can cost consumers a lot of money.

Georgia residents are entitled to two free reports each year. South Carolina residents must pay unless they were recently denied credit based on information in their credit reports.

Under a new federal law that goes into effect Dec. 1, consumers applying for mortgages will be able to obtain their score for free from lenders.