Knowing how credit scores work is crucial to borrowing wisely. Yet, millions of people — especially low-income consumers — do not understand how such scores work.
In fact, 58% of low-income consumers say their knowledge of credit scores is “fair” or “poor,” according to the 10th annual credit score survey from the Consumer Federation of America (CFA) and VantageScore Solutions.
Just 37% of high-income consumers say the same about their own grasp of credit scores.
When asked questions about credit scores, high-income consumers are much more likely to answer correctly than low-income consumers, the survey found.
For example, 95% of consumers with incomes of at least $75,000 know that mortgage lenders use credit scores when deciding whether to lend money, and at what terms. Just 75% of consumers who earn less than $25,000 understand this fact.
In the high-income group, 92% understand that credit card issuers also use credit scores to evaluate borrowers. Just 76% of borrowers in the low-income group realize this.
This lack of knowledge about credit scores adds to the financial challenges low-income borrowers face, says Stephen Brobeck, a CFA senior fellow.
“At least one-quarter of low-income consumers lack the knowledge to help them raise low credit scores. This lack of awareness could limit their access to credit or subject them to higher costs. Low income households can least afford to pay higher interest rates and fees associated with low credit scores.”
Despite not fully understanding how credit scores work, low-income borrowers are more likely to say they intend to apply for credit in the next 12 months.
The survey — which involved around 1,000 consumers — found that 20% of households with incomes below $25,000 intend to apply for credit in the next year. That tops the 13% of households with incomes of at least $75,000 that intend to apply for credit over the next year.
In an effort to address the knowledge gap, CFA and VantageScore will work with organizations and networks that serve low-income residents to disseminate an online credit score quiz.
The quiz — found at the CFA and VantageScore interactive website CreditScoreQuiz.org — is 12 questions long and is available in both English and Spanish.
Looking for more tips on raising your credit score? Check out “5 Simple Steps to Increase Your Credit Score in 30 Days.”