Study Shows Credit Scores Often Ignored: Why You Definitely Shouldn’t Ignore Them

While many consumers may know that their credit score is one of the most important aspects of their financial life, a new poll shows that unfortunately, many have a limited knowledge of how they work, including incorrect assumptions that could hurt their chances for having the best ratings possible.

When it comes to what makes up their credit scores, many people did not know what went into them, or how it would be used by lenders, according to a new poll from the Consumer Federation of America and VantageScore Solutions. For instance, more than two in five believed that their age and marital status are used to calculate their credit ratings, when this is not the case. Moreover, more than one-quarter were unaware that applying for a number of credit cards at the same time, or having high balances, would lead them to have diminished scores overall.

“Credit scores have become so influential in the lives of most consumers that tens of millions are severely disadvantaged by their lack of knowledge about these scores,” said Stephen Brobeck, executive director of the CFA. “Low credit scores will often cost car buyers more than $5000 in additional finance charges and cost home purchasers tens of thousands of dollars in additional mortgage loan costs. And low scores are likely to limit consumer access to, and increase the cost of, services such as cell phone service, electric service, and rental housing.”

What does go into a credit score?

While it’s one thing to say there are many misconceptions about how credit scores work, it’s another for consumers to actually come to an understanding about them. For this reason, there are a number of things these people need to keep in mind when it comes to dealing with their credit scores, and the most important of them is the gravity of any late payments they might make.

Payment history accounts for a full 35 percent of one’s score, making it the single largest factor that goes into determining such a rating. This means that borrowers who miss even one deadline, whether it’s by a couple of days or a couple of months, is going to see their scores drop appreciably, undoing potentially months or even years of hard work to maintain a strong rating. And unfortunately, borrowers can only make up for the misstep by making several months or more of payments on time and in full, which won’t eliminate the issue, but it will show lenders that it was a one-time incident that is unlikely to be repeated.

The second-largest portion of one’s score – another 30 percent – is the amount of debt they carry versus their total credit limits. Another common misconception about credit card debt is that lenders want borrowers to have a lot of it, but this is actually the opposite of the truth. In reality, they prefer to see borrowers carrying as little as possible, and therefore the best way to maximize this portion of one’s scores is to keep balances at 30 percent of total available limits or less. Any more than that and their scores will begin to erode.

Another 15 percent of scores are made up of the average length of time for which consumers have had their various lines of credit, and longer is considered better. For this reason, borrowers who are successful in reducing their credit card balances to zero, for instance, will actually be wise to keep the accounts open even as they don’t use them going forward, just to continue buoying this aspect of their scores.

Finally, the last two credit score factors lenders actually consider, which account for 10 percent each, are the mix of credit types borrowers have in their names, and the number of times they’ve recently applied for a new line of credit. In general, lenders want to see borrowers with different types of accounts — credit cards, mortgages, auto loans, student financing, etc. — because it shows them a borrower can juggle many different types of credit. Meanwhile, they should also try to avoid repeatedly applying for new accounts, because that is viewed as a sign borrowers are struggling with cash flow.

Another oft-missed aspect of healthy credit

Of course, when it comes to maintaining strong credit ratings, consumers should also take the time to order copies of their credit reports and check them over closely for errors. This might help them to determine whether any unfair markings are having a negative impact on their standings, and if these entries do appear, working with a credit repair company may help to resolve the issue. This, in turn, can potentially allow borrowers to see their standings returned to where they deserve to be, more quickly than they might have been able to accomplish on their own.

Posted in Credit Score
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