Financial education isn’t standardized in the United States, leading many Americans to rely on loved ones or the news media for guidance and manage their money through trial and error. As a result, they have significant blind spots about basic concepts, a recent survey by NerdWallet and Harris Poll shows.
The survey of more than 2,000 adults shows that most Americans don’t understand the effects that common actions have on their credit scores, largely underestimate how many credit scores they have, and don’t understand how credit card interest works. These knowledge gaps can be costly, resulting in high interest rates and low, or no, credit card rewards.
What Americans don’t know could be hurting their credit
The FICO score is the most widely used credit scoring model, and five factors go into it:
Financial decisions that affect these factors can improve or hurt a credit score, but many consumers aren’t sure of the impact their actions have.
For example, more than half of Americans (54%) don’t know that carrying a balance on a credit card from month to month does nothing to help a person’s credit score. Keeping and using a credit account regularly can improve your score, but the balance should be paid in full each month to avoid racking up interest charges.
Almost 8 in 10 Americans (78%) don’t know that closing an older, paid-off credit card will likely hurt their scores. In the short term, closing a credit card account increases your credit utilization, which is the amount you owe compared with your total available credit; in the long term, it lowers the average age of your accounts. Both of these can take points off a credit score.
Fewer than 1 in 10 Americans (8%) know that a late payment usually doesn’t affect a person’s credit. A late payment may result in fees and a higher annual percentage rate, but if it’s made within 30 days of the due date, it probably won’t have any impact on your credit score.
Only 9% of Americans know they have multiple credit scores
People often refer to their “credit score” in the singular, as if they have only one score. But three major credit bureaus — Equifax, Experian and TransUnion — collect consumer data independently of one another, and hundreds of different scoring models use their data. In the survey, however, 91% of Americans didn’t know that there are more than three scores on which their creditworthiness may be judged.
While there are many different scoring models, they don’t all carry the same weight with lenders. Lenders most often look at FICO scores. Each of the credit bureaus generates FICO scores based on its own data. Many credit card issuers and other lenders allow customers to see their FICO scores for free. And consumers who can’t access a free score can buy them from the credit bureaus directly.
Save and earn more by learning about credit cards
Americans who want to improve their financial lives can start with a solid understanding of credit cards and credit scores. A good credit score can help consumers obtain a loan at reasonable rates, get a good price on insurance and even rent an apartment. And a credit card, when used correctly, can earn rewards and protect purchases without incurring any interest.
But more than half of Americans (55%) don’t know when their purchases start accruing interest, the survey shows. Interest doesn’t accrue until the day after a credit card bill is due, so if you pay in full before then, you won’t owe interest.
Meanwhile, only 4 in 10 of those surveyed understood when it’s worth it to obtain a credit card that carries an annual fee. The answer? When the value of the rewards or perks you get from the card outweighs the fee.
Understanding credit cards is essential if you want to use them to your advantage. Check out the study, take the quiz to see how much you know about your credit and learn how you can improve your financial life with NerdWallet’s tips for building credit.
Source: USA TODAY