Most Americans Don’t Understand Their Credit Score

(Associated Press)

Unless you have a contract like A-Rod, you need to know your credit score.

Searching the Internet this morning, I came across an interesting article about the ineffectiveness of credit score commercials. According to Becky Yerak, a columnist for The Chicago Tribune, the plethora of credit score advertisements on television appear to be having little impact on consumers.

No, the reason has nothing to do with the quality of the commercials — as annoying as they may seem sometimes. Rather, as staggering statistics from a recent poll prove, a large percentage of the adult population in the United States lacks a basic knowledge of how credit scores work. Since there is a general lack of knowledge on the subject and the majority of commercials lack the flair of a Bud Light or Geico spot, people have tended to turn away.

In May, the Opinion Research Corporation surveyed 1,000 U.S. adults about their knowledge of credit reports and scores. Personally, I was surprised that only 47 percent of the people who participated in the survey considered their credit to be good or excellent. Even more stunning to me, only 27 percent, meaning just 270 of the 1,000 people surveyed, knew the meaning of the term “credit score.”

In order to establish strong credit, it’s imperative to understand how credit reports and scores work. Not only should you understand how credit works, you should know what your credit score is at all times. Without a general knowledge of credit, it becomes exceedingly more difficult to have a good credit score. And unless your name is Alex Rodriguez, who earns more in a day than most people do in an entire year, you need to have a good credit score to ensure financial success.

For the 730 people from the survey, or anyone else out there who doesn’t know what a credit score is, here is a cheat sheet for you.

A credit score is “a numerical expression based on a statistical analysis of a person's credit files, to represent the creditworthiness of that person, which is the likelihood that the person will pay his or her debts. A credit score is primarily based on credit report information, typically sourced from credit bureaus / credit reference agencies.”

Now you know. The next step you should take is to find out what your current credit score is. The video below will give you more information on how to acess a FREE Triple Credit Report.



With Joe Coffey, the former head of the NYPD Organized Crime Task Force, who is widely known for his role as one of the lead detectives in the infamous Son of Sam investigation, as the host, you will be on the edge of your seat for the duration of the above clip. This video definitely doesn't fall into the category of annoying credit score commercials. Hey, it's Joe Coffey! What I want to know is who is going to play the former investigator in The Bronx is Burning, the new series on ESPN revisiting the New York Yankees run to the World Series title during the 1977 season, the Summer of Sam?

FICO is Ready to Adopt a New Credit Scoring Formula

The Fair Isaac Corporation, best known for establishing the commonly accepted and used FICO credit score, is scheduled to debut a brand-new credit scoring formula in September. The change is expected to affect over 60 million consumers with established credit.

Carolina Newswire guest columnist, Pat Earnhardt, discussed the changes in extensive detail in her article on Tuesday. Earnhardt, a Mortgage Consultant and Senior Mortgage Banker for The Mortgage Rewards Team of Alera Financial, is more than an expert when it comes to the subject.

Here are the changes.

Change # 1: An end to credit boosts for authorized users on accounts:

Per Ms. Earnhardt,

“An end to credit boosts for authorized users on accounts — Fair Isaac estimates that about 30% of the 165 million consumers with enough information on their credit reports to have a credit score calculated have someone on their account as an authorized user. Authorized users on credit cards are not responsible for paying the balances but are approved to make purchases with the cards. Often, authorized users are family members of the actual cardholder, such as a college student on his/her parents' card or spouses who may have little or no credit of their own. With the old scoring model, coat tailing by authorized users could improve their credit score considerably if the primary cardholder kept balances low and paid the required monthly payments on time over a long period.”

For all of you college students out there who are listed as an authorized user on a parent’s credit card, you will have to find a new way to establish and improve your credit. This change in the new formula certainly would have been a blow to my credit score a few years ago.

Change # 2: Adding more population segments:

Per Ms. Earnhardt,

“Another major change is the addition of two more population segments. The theory at play with this segment change is that more population segments will make the scoring system more accurate overall, since the risk of putting someone in the wrong pool will be lower. In the past, FICO grouped consumers into 10 groups or consumer pools called population segments. These groups fell in pools — such as high-risk borrowers or borrowers with thin credit profiles, etc. Each group uses a slightly different version of the credit scoring formula.

Under the new system, the population will be divided into 12 segments: eight for people with good credit and four for people with bad credit. This increase in groups could result in a slight change of a consumer’s credit score either up or down. But even a slight movement of your score could have an impact on your interest rate or ability to be approved for a loan.”

Make no mistake about it; these changes could be extremely detrimental to your credit score. However, according to Ms. Earnhardt, there are two quick and easy steps that you can take in order to improve and protect your credit score under the new system.

1. Married couples: If you have an account(s) with your significant other as an authorized user, convert this to a Joint Credit Account.
2. Younger consumers: Apply for a secure credit card in your own name. Applying for a secured credit card is often the first step towards an illustrious career in the sport that is credit.

I would recommend forwarding Earnhardt’s article to any of your friends who will be affected by FICO’s new credit scoring formula. The public needs to be aware of the new formula and soon — September is just around the corner.

And for even more tips on how to improve your credit score and prepare for the new change in the FICO formula, click here.

By the way, for those of you who are wondering, Pat has no affiliation with the legendary Earnhardt racing family. Sorry to disappoint! But when it comes to mortgages, she is a strong contender in the chase for the CREDIT cup.

Also, I came across a related article on a new tactic that will help lenders mitigate authorized user abuse. TransUnion, one of the three major credit bureaus, recently "developed a customized approach that enables lenders to identify customers who may have added authorized user accounts to artificially inflate their credit report and standing." I strongly advise reading the article.

Can You Rent a Credit Score?

I came across a surprising blog post this afternoon. According to Bob Brooks, who is the host of the radio show "Prudent Money" in Dallas, Texas, people who are looking to improve their credit score can borrow credit history from someone with good credit.

An Internet company, not named in Brooks’ post, can increase your credit score by making you an authorized person on someone else’s credit card -- usually an individual with excellent credit history. When you become an authorized user on a credit card belonging to a person with a high credit score, that person’s credit history will eventually be transferred to your credit file.

Why would someone ever allow this company to add authorized users to their credit card?

When I first started reading the post, this question quickly popped into my head. I began to think about all of the negative reasons why a person should never do this. But as I read further, I confirmed my initial suspicions. Money -- the one thing that consistently motivates people – is the driving factor for this operation. According to Brooks, “There is big dollars in it for people who are willing to allow this company to use their credits cards by adding authorized users.” The company, run by Adam Wheeler, reportedly offers an exorbitant amount of money to people with strong credit scores in order to allow an authorized user on to their credit cards.

I need to do more research on this subject, but I remain very skeptical about this rent-a-credit technique. To be honest, the operation seems extremely shady to me. The Federal Trade Commission is currently investigating this, but as of right now, there hasn’t been any legal action taken against the company.

Essentially, the company helps people lie to credit lenders, which is very unethical in my eyes. And apparently, the Nevada Mortgage Lending Division agrees.

Per Mr. Brooks:

"However, the Nevada Mortgage Lending Division states that anyone associated with this scheme “will be subject to administrative action and potential criminal penalties.

Adam Wheeler who runs this unethical scheme states his business is “legal” but he conceded that “some people might say it’s unethical.” He also said he does not “condone fraud against mortgage institutions.” If clients are going to lie to lenders, he says, “that is not good."

I predict that this practice will have a short life span. Most likely, new legislation and legal repercussions for doing this will halt the operation quickly.

And for anyone ever considering renting a credit score, I would highly recommend against it. If lenders ever find out about you doing this, this will be used against you in all future credit, loan, or mortgage applications.

As it is in every facet of life, there is no get-rich-quick scheme or shortcut when it comes to having good credit. From your credit score to golf game, there is only one way to improve -- through hard work. I sound like a grandfather when I say that, but from my personal experience, that statement has always proven to be true. In this instance, improving your credit score, hard work translates into being smart with your credit. The best way to improve a credit score is to consistently pay back all of your credit card, loan, or mortgage bills on time.

For a full list of ways to improve your credit score without having to rent another person’s credit history, click here.