Visa Inc. conducted a phone survey recently to find out what Americans think of the way that their credit scores are determined. The results reveal that consumers have a lot of misconceptions about what credit reporting agencies take into account when generating a score.
The most disturbing finding, according to Visa, was that 42% of Americans do not regularly check their credit score. But aside from this error in judgement that respondents admitted to — which Visa’s Senior Director of Global Financial Education, Jason Alderman compares to “driving with your eyes closed,” in his prepared remarks — there were several widespread misconceptions about the way that credit scores are calculated, and how creditworthiness in determined.
The survey revealed that customers think that scoring agencies look at far more than they do when they calculate your score.
Widespread Misconceptions About Credit Scoring Practices
The three most common misconceptions are that scoring agencies take into consideration;
- employment history (59.9% thought this)
- interest rates on existing debt (58.7%) and,
- total assets/savings (53.1%).
38.6% of respondents believed that age is a factor in determining credit scores, which is not true per se, but there is a correlation there: the longer you have had credit, and used it properly, the better your score.
Respondents also believed that national origin (21.6%) played a part in determining creditworthiness, as well as geographical location (25.3%) and English skills (21.6%). Fewer believed that gender and race play a role in credit scoring — 17.2% and 15.7%, respectively — but about one in six Americans do make this mistake, which is troubling.
This is bad, according to Visa, because it gives people an excuse not to attempt to improve their score, thinking that factors out of their control, such as race or gender, factor into it.
What Goes Into a Credit Score, Then?
Credit scores, like quarterback ratings, are one of those crucial scores that no one seems to understand. Fortunately for us, we know exactly what goes into a credit score — your credit history, nothing else — and what sort of behavior is rewarded. Specifically, credit scores take into account how much money you owe (compared to how much you can borrow), how many different kinds of credit you have dealt with, your payment history on these lines of credit, the length of your credit history, and the number of applications for new lines of credit you have made recently. It’s all about your credit history, not who you are.
In order to keep your score high, all you need to do is use credit cards, make your payments on time, and not max them out.
What these misconceptions tell us, maybe, is that people either confuse credit scores with the credit check they go through when signing a lease (which does include employment history and an examination of your total net worth, and does allow for race- and gender-based discrimination given that brokers typically meet their clients) or that people seriously mistrust the entire financial industry.
No matter what the explanation, this isn’t good news for creditors or customers.