If you don’t know your credit score, you form part of the 56% of American consumers who also have no idea, according to a new survey commissioned by the American Bankers Association.
Knowing your credit score can determine whether or how you can get:
- Credit cards.
- Car loans.
- Property rentals.
Your credit score may also affect your insurance and employment decisions.
Nessa Feddis, American Banker’s Association’s (ABA’s) senior vice president and deputy chief counsel for Consumer Protection and Payments, said:
“People might have a scare when they apply for a loan and discover that a low credit score could mean a higher interest rate or no loan at all.”
The credit score survey
ABA commissioned Ipsos Public Affairs to carry out the study, which included 1,000 American adults between August 8th and 13th, 2013.
The survey found that:
- 42% of respondents knew their credit score.
- 56% did not know.
- 2% did not provide an answer to the questions.
What is your credit score?
Your credit score represents your creditworthiness – an assessment how you are likely to behave with your debt obligation. Your credit report, which has details on how punctual you are on paying your bills and how much of your available credit you use, contributes toward your credit score.
People’s credit scores can be obtained from major credit bureaus, such as Equifax, TransUnion and Experian. These companies gather people’s and company’s payment and credit data and sell this information to lenders.
When lenders consider potential candidates, they use their credit scores to decide whether to lend, how much, and at what interest rate. A person’s credit score may also determine whether the lender decides to ask for additional security on the loan.
Credit scores may also be used by organizations for screening insurance applications and job candidates.
Feddis said “There is no overnight fix for a low credit score, but there are steps you can take to improve it over time. Paying your debts on time and demonstrating that you can manage credit responsibly can help you gradually rebuild your score.”
The FICO credit score
In the United States, the FICO score is the best-known and most widely used credit score model. It is used by the major credit reporting bureaus.
Your credit report can contain different data at each of the bureaus, therefore FICO scores may vary depending on which bureau has issued the score.
The FICO score is made up of the following components:
- Payment history: 35%. People who are late in paying their bills will have a lower score here compared to those who pay them on time.
- Credit utilization: 30%. The ration of current revolving debt to the total available revolving credit or credit limit. The more debt you pay off, the higher your score will be here.
- Credit history length: 15%. As your credit history gets longer (ages) your FICO score usually improves.
- Types of credit: 10%. This score reflects how well you manage different types of credit, such as consumer finance, mortgage, installment, etc.
- Recent searches for credit: 10%. If you have applied for many loans and different credit cards recently, you may score badly here.
Tips for a good credit score
- Order your annual credit report – by law, Equifax, TransUnion and Experian have to provide you with a free copy of your credit report annually if you ask for it. You can get a free copy of your credit report at AnnualCreditReport.com (Tel: 1-877-322-8228).
- Understand the power of credit – financial institutions view your credit history as data on what your future financial behavior is likely to be. If you use credit wisely and build a good credit history, you are much more likely to be offered loans at low interest rates, rent property, buy a home or car, and even get that job you were after.
- Credit applications – read the small print – before signing any contract read the small print carefully. A credit application is a contract.
- Keep up with minimum payments – make sure at least the minimum due is always paid on time. If you have problems making payments contact your creditor immediately, this will help avoid extra fees and a higher APR. Pay more than the minimum if you want to settle the loan more quickly.
- Treat credit report “fixers” with suspicion – be wary of those who say that they can fix your credit report. The only thing that can fix that is a gradual improvement in your payment history.
- Overspend – only spend what you can afford. Any loan/credit has to be paid back. You are responsible for managing your debts and making sure you can keep up with your commitments with lenders. Try not to reach your credit limit or “maxing out” your cards.
- Pay bills late – if you are late paying your bills your credit score will be affected. If you think you are going to be late in any payment, contact your creditor.
- Ignore credit trouble warning signs – if you only ever pay the minimum required, often pay late, use cash-advances to meet your daily living expenses, or transfer many balances you may be in the credit “danger zone”. In order to regain control of your finances consider talking to a non-profit financial counseling organization, such as the National Foundation for Credit Counseling.
- Share personal details – never reveal your credit card or personal data if no transaction has been initiated. Identity theft is big business and there are many sophisticated phishing scams. If you believe your identity may have been compromised, let your bank know immediately and file a complaint with the Federal Trade Commission – ”Identity Theft” (Tel: 1-877-438-4338).