Equifax study shows most Americans are Aware of Factors that Impact Credit Worthiness

Equifax did a study to commemorate Financial Literary Month in April 2016 and their online survey gathered responses from 1,008 consumers.  Overall, the study found that most Americans are aware of credit and how it affects them.  Here is a summary of its findings.

Free Credit Reports

81% of respondents were aware that they could get a free credit report annually.

However, when asked when the last time was that they checked their credit reports:

  • 12% didn’t remember the last time.
  • 24% said within the last year.
  • 13% said within the last week.
  • 20% said within the last month.
  • 14% said they had never checked their credit report.
  • 16% said they had checked it more than a year ago.

This makes 40% of Americans that are not checking their credit reports, despite the high percentage of respondents who knew they could check for free. The survey did not ask consumers if they knew where to get their free credit reports; but for the record, the best source for your free reports is the government-run website annualcreditreport.com.

Checking your credit report at least yearly is very important to make sure you are not a victim of identity theft and also to make sure you there are no errors on your report.  Credit report errors can take a long time to correct in some instances, so you don’t want to be caught unaware when you are applying for new credit.  Identity theft issues can drag on for 6 months or more.

Credit Card Usage

Most Americans have at least one credit card. Some of the stats:

  • 60% percent had two or more credit cards.
  • 22% didn’t have a credit card.
  • Of those that had a credit card: 33% used them for the majority of purchases, 33% used them for all purchases, 21% used them for minor purchases and 11% said they used them only for emergencies.

Having a credit card is an effective way of building and maintaining your credit worthiness. However, be warned: the overuse of credit cards is one of the biggest reasons people get into trouble with their credit: they get into debt and can’t make payments, resulting in late pays on their credit reports and if things go too far, collections.  Buying things within your credit budget is part of being fiscally responsible.

Another thing to consider when applying for credit cards: every time you apply for a loan or credit card, an inquiry is placed on your credit report, and this inquiry can drop your score by up to 5 points.  In addition, getting any type of new credit will lower the average age of your accounts, which can also drop your credit score. If your credit is bad, and you are having trouble getting approved for a credit card, you might want to consider getting a secured credit card.

Credit Score Checks

When applying for new credit, most lenders do not look at your credit report to analyze it, but instead look at your credit score, and base their decision on that.  In the Equifax survey, respondents said:

  • 27% do not check their credit scores.
  • Of those that checked their credit scores: 32% received their score for free at a third party website, 25% received their score from their credit card company, 14% received their score from their bank, 4% paid from their credit score from a credit bureau, 3% paid for their score from a third party website.

If you get your credit score, you should use it as a yardstick for your credit and not treat it as an absolute number.  There are two main classes of credit scores: FICO scores and VantageScores, and each type has many subtypes of scores:  specialized scoring models for mortgages, autos, credit cards, etc.

If you get your credit score for free at one of the many free score sites, you are most likely getting a version of the VantageScore; most lenders use a version of the FICO score. If you buy your credit score from myFico.com, you are going to get the FICO 9 version of your score, a score that many lenders have not yet adopted (most lenders use the a version of the FICO 8 credit score for credit cards, and FICO 04 for mortgage underwriting).

To see where you fit in the credit score landscape, review our report on credit scores in America.

Factors that Affect Credit Score

There has been a push to educate consumers on the intricacies of credit, and for the most part, it seems to be working:

  • 40% of consumers know negative information stays on a credit report for 7 years.
  • Consumers accurately selected items that affect credit scores: how much is owed on credit cards (83%), opening new accounts (68%), how long you have been using credit (64%) and the types of loans you have (60%).
  • Consumers inaccurately selected what they thought affected your credit score but didn’t: being denied for credit (56%), interest rates (30%) and checking your credit report (30%).
  • More people knew the things that positively affected credit scores: paying your bills on time (95%), keeping your balances in check with budget (78%), check your credit report for errors and correct them (73%).
  • Only a few people were mistaken about things actually hurt their credit when they thought it would help them: closing a credit card before applying for financing or a large purchase (9%), closing all of your open credit accounts (9%), making a large purchase knowing you cannot afford the monthly payment (4%).

The Scoop: What Really Affects Your Credit

In general, your credit is affected by 5 main factors: the amount of debt you have, your payment history, the average age of the accounts you have, the types of credit you have and the amount of new credit you have.

Other tips for improving your credit besides paying your bills on time (by far the most important aspect of your credit score):

  1. Don’t be like the 40 percent in the survey that didn’t pull their credit reports! Errors are all too common in the credit-reporting world.
  2. The amount of credit card debt you have can impact your credit score in a very significant way. If you have a maxed out credit card, you could see yourscore sink by 45 points! Pay down your balances to below 25% of your credit limit.
  3. Don’t think that if you have no credit it’s the same as good credit. Having no credit is the same as having bad credit – lenders have no measuring stick by which to judge your financial habits and as a result, the credit scoring system calculates your score at the bottom of the pile.
  4. If you decide you want to open new credit accounts, don’t open a lot all at once – you don’t want a lot of inquiries on your credit report, which can cost you points.

If you do find errors on your credit report, you can contact CreditRepair.com for help.