Don't Know Much About Credit Scoring? You're Not Alone

Posted by Donny Mak on Friday, May 18th, 2012 at 1:00am.

Don't Know much about credit scoring?

It should not be seen as an embarrassment, or personal shortcoming if you don’t really understand much about credit scores. Few non-financial industry people out there really understand how they’re formulated. There was a survey released by the Consumer Federation of America (CFA) that implies we all should really get smarter on the subject. Not knowing the nuts and bolts of the credit score process can cost you money when you’re applying for a mortgage.

The CPA survey showed that there has been an learning curve over the course of the mortgage crisis, and in the past year, the survey showed, more of us understand how bank use credit scores and how they collect the data. But how are the scores calculated? How do they get to that number, exactly?

The survey found that respondents didn’t fully understand how a low credit score could hurt them. Example: Only 29 percent knew that if you bought a car for $20,000, with 60-month auto loan, if you had lower credit you probably paid $5K more than somebody with higher credit.

More stats: 56 percent erroneously believe that a person’s age, and 54 percent believe a person’s marital status, are used to calculate a credit score. 21 Percent wrongly assumed that a person’s ethnicity is a factor. 

About half of the respondents do understood that basic fact that banks use a credit score to calculate risk when they lend money. However, 22 percent wrongly thought credit scores were just about the amount of their debt. Not always true. 

More people are getting it. They have a better understanding of what can hurt or help a credit score: high credit card balances, chronically late or missed payments, bankruptcies. The bottom line: make payments on time, you’re score goes up. Miss a payment (or a few payments) and you’re going to sink lower in the eyes of your lending institution. Not rocket science.

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