Many Americans are still totally confused about credit scores

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When it comes to credit, most Americans know a few key things. They understand that a good credit score is important and that a bad score can prevent them from getting a credit card or qualifying for a loan. After that, there is a lot of confusion and misinformation, according to a new investigation by the NerdWallet financial site.

“I’m really encouraged that people know that credit scores exist and have a general idea of ​​how they work, but there are some important details that are still missing a lot of people,” said Liz Weston, NerdWallet columnist and author of book “Your Credit Score.

“People still don’t understand how pervasive credit scoring is in their financial lives,” she told NBC News. “They don’t understand how important good credit is in all areas of your financial life, not just for borrowing money.”

The NerdWallet survey of over 2,000 adults found that:

  • Eleven percent thought everyone started with a perfect credit score. In fact, credit is something that you build over time by using credit responsibly. But you can remove that score overnight if you’re paying late bills or using your credit cards to the max.
  • About half (49%) were unaware that having bad credit can limit a person’s options for mobile phone service. There are ways to get a cell phone without a credit check, such as with a prepaid plan, but people with poor credit have fewer options.
  • More than two in five (41%) mistakenly believed that carrying a small balance on a credit card month-to-month could help improve a person’s credit scores.

“The reality is, you don’t have to carry a scale; you don’t have to be in debt to have good credit scores, ”Weston explained. “You have to have credit accounts and use them lightly, but regularly. There is no reason to carry a balance. There is no reason to pay a dime of interest. I don’t have one and I have great scores.

the uppercase one Credit Confidence Study published late last year revealed similar widespread misconceptions regarding a range of credit-related issues and the factors that will help or hurt your scores.

Two-thirds (66%) of 2,300 adults surveyed think people with good credit get special treatment and more than half (55%) agree that people with bad credit are treated like second-class citizens zoned. But many did not understand the full implications of bad credit.

Related: Almost a third of credit card holders don’t use their rewards

For example: 31% said closing an unused credit card account is a good thing. In fact, it could be harmful. This is because the average age of your accounts is an important factor used to generate your credit scores. Keeping your oldest cards open usually helps your scores. It would make sense to close an unused account if you are paying a high annual fee and aren’t about to apply for credit in the near future.

“Obviously, there are financial implications of not being able to get a car or home loan, or getting a higher interest rate if you get the approval,” said Pranav Khanna, vice president of product management at Capital One. “But there is a lot that people don’t know – and even what they think they know is sometimes inaccurate. “

Some common credit myths

Most of us refer to our “score” as if there is only one number that reflects our creditworthiness. In fact, most of us have many different credit scores depending on the type of lender involved, which of the Big Three credit bureaus they contact, and the scoring program used. “You have a lot of credit scores and they change all the time, so the score you get for free from your bank or website may not be the same one a lender uses – and that’s causing a lot of confusion.” , Weston said. “People think there should be a score that everyone sees, but that’s not how it works.”

In fact, mortgage lenders use a unique scoring model that’s even different from the free FICO score you can get. This is why Weston recommends going to MyFICO.com and pay for your score. If you want to see what the lender sees, this is where you need to go to get it, she said.

There is also a lot of confusion over what a good score is. The most common credit scores assess our creditworthiness on a scale of 300 to 850.

One in five people surveyed by NerdWallet think a score above 600 is good. In fact, anything below about 620 is considered subprime. This means that it will be difficult to get credit, and you’ll pay more – usually in the form of higher interest rates – when you get it. The goal is to be above 720 (considered good) and try to reach the top 760 (excellent).

“Once you go over 760 you will find that you get the best rates and terms, you get the best treatment because lenders really want your business, owners trust you and insurance companies want your business,” he said. Weston told NBC News.

Widespread use of credit scores

Credit scores are used for much more than granting credit and determining interest rates. Some examples: Employers often do credit checks before hiring someone. Many utilities determine the required deposit based on the customer’s credit rating. Rental inquiries generally require credit checks. And insurance companies often review their customers’ credit scores.

Recent insurancequotes.com studies have found that bad credit can increase the cost of car insurance (except in California, Massachusetts and Hawaii where the practice is not permitted) and home insurance in most states.

“Even drivers and owners with fair credit pay a lot more than those with great scores,” said Laura Adams, senior insurance analyst at InsuranceQuotes. Studies have shown that:

  • With auto insurance, a person with fair credit will pay on average 28% more for auto insurance than a driver with excellent credit. A driver with poor credit could see their premium doubled.
  • Policyholders with fair credit pay on average 36% more for home insurance than those with excellent credit. Someone with poor rather than excellent credit will see their premium more than double, increasing an average of 114%.

“It’s never too late to improve your credit so you pay less for credit accounts and lower the cost of auto and home insurance,” Adams told NBC News.

What would you like to know

Credit scores are based on five basic factors: payment history, credit usage, length of credit history, types of credit, and new credit.

One of the best things you can do is pay your bills on time, all the time. If you can’t pay the balance in full, make at least the minimum payment. A single late payment of 30 days or more can boost your scores.

And don’t overuse your credit. You want credit usage – the percentage of available credit you are using at any given time – to be less than 30% for each account and all combined. Financial experts say 20% or less usage is even better.

Related: Free credit score? Credit bureaus arrested for deceptive practices

Remember: Maxing out your credit cards or even getting close to the limit will hurt your scores, even if you make your payments on time every month and don’t go over your limit. As the burden of your debt increases, you are considered a greater risk to creditors.

Many people believe that checking their credit score will bring them down. This will not be the case. So if your bank or credit card company offers such a monitoring service, it’s a good idea to use it – to keep track of your progress. Various websites also offer free sheet music, but you may receive advertisements from this company.

The Consumer Financial Protection Bureau contains information about credit reports and credit scores on its website.

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