On the House: What do you know about credit scores?

Posted: June 25, 2012

A few months ago, I wrote about efforts in this region and elsewhere to make consumers more savvy about financial matters.

These efforts are designed to prevent another financial meltdown like the one from which we are still struggling to emerge. Financial-literacy courses are being introduced into high school curriculums in the hope that the earlier such education starts, the less the likelihood of a repeat.

Wishful thinking? Perhaps. Yet how well you learn to manage your money early on undoubtedly will have a bearing on your credit score and your ability to navigate life later.

The higher your credit score — anything over 700 is considered good — the better the interest rate on your mortgage, for instance.

In late April, the Consumer Federation of America polled 1,000 consumers nationally by phone to determine the extent of knowledge about credit scores. It was not the first time such a poll had been conducted. The results, however, showed the greatest improvement thus far from one year to the next, said executive director Stephen Brobeck.

There's room for improvement in certain areas, he said. For example, fewer than half understood that a credit score typically measures a person's risk of not repaying loans, rather than that person's amount of debt, financial resources, or other factors.

You can test your own knowledge on the topic at http://creditscorequiz.org, but I'd thought I'd relay in this space some of the questions and answers that I found most revealing.

First: Who uses credit scores? Only just about everybody. Not only do mortgage lenders depend on them, but landlords, the electric and gas companies, credit-card firms, home insurers, and cell-phone providers.

Cell-phone companies may use credit scores to help determine which plan you may be eligible for and whether any security deposit is required. In some states, home insurers may use credit scores to help gauge your risk level as a potential customer and accurately price that risk into your premium.

Utilities may use credit scores in evaluating whether to require you to put down a security deposit and the amount of that deposit.

How many of you knew all that? Raise your hands.

Word-problem time: On a $20,000, 60-month auto loan, about how much more would a borrower with a low credit score typically pay than a borrower with a good score? The choices: under $1,000; $1,000 to $3,000; $3,000 to $5,000; more than $5,000.

The answer: more than $5,000. On a typical auto loan from a bank, a borrower with a low credit score would likely be charged a higher interest rate, and likely pay at least $5,000 more over the life of the loan.

More? OK.

Is a person's age a factor used to calculate credit score?

Answer: Age is not one of the factors used to calculate credit scores, but the age of a person's credit accounts may be a factor in the person's credit score.

Are missed payments a factor used to calculate credit score?

Missed payments are one of the factors used to calculate a credit score. The greater the severity or number of delinquencies, the lower one's score.

How can you raise your credit score? • Consistently pay bills on time every month. • Do not max out, or even come close to maxing out, credit cards or other revolving credit accounts. • Pay down debt rather than just moving it around; also, don't open a lot of new accounts rapidly. • Regularly check credit reports, which can be obtained free of charge, to be sure they are error-free. You can access your reports free of charge through www.annualcreditreport.com, or by calling 877-322-8228.

"On the House" appears Sundays. Contact Alan J. Heavens at 215-854-2472, aheavens@phillynews.com or @alheavens at Twitter.

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