For consumers, credit scores matter — a lot

How much does a credit score matter? It matters a lot.

On a $20,000, 60-month auto loan from a bank, a borrower with a low credit  score would typically be charged a higher interest rate and pay at least  $5,000 more than a borrower with a good score, according to the Consumer  Federation of America, Washington.

But only 29 percent of the more than 1,000 adults surveyed by telephone in  April knew that, the Consumer Federation and VantageScore Solutions reported  last week in the their second joint annual survey of consumer knowledge  about credit scores.

Barrett Burns, president and CEO of VantageScore, a Stamford, Conn., credit  rating system developed as an alternative to FICO scores, said many  consumers also didn’t know that credit inquiries can influence their credit  scores.

However, almost all credit score models used by lenders take rate-shopping  inquiries made within a two-week period as a single inquiry.

“Many consumers also believe that a person’s martial status and even  ethnic origin can influence their credit scores,” Burns said.

The truth is, those factors are not considered in calculating a credit score.

Credit scores can be lowered due to missed payments and delinquencies, high  credit card balances and personal bankruptcies.

What does count and how can consumers raise their credit scores? Especially  important are:

  • Consistently paying bills on time every month.
  • Not maxing out, or even coming close to maxing out, credit cards or other  revolving credit accounts.
  • Paying down debt rather than just moving it around, as well as not opening  many new accounts rapidly.
  • Regularly checking credit reports to make sure they are error-free.  Information about someone with a similar name can land in your file. You  can access your reports for free at annualcreditreport.com, or by  calling (877) 322-8228 .

A major concern is student debt, Burns said.

“According to the Federal Reserve Bank of New York, over $100 million in  student loans were taken out last year, and the total loans outstanding  exceeds a trillion dollars, which is a staggering amount,” Burns said.

More than 90 percent of students who earn a bachelor’s degree took out a loan  to pay for it, up from 45 percent in 1993. Nearly one in 10 borrowers who  started repayment have defaulted within two years.

When a student loan comes out of deferment and it’s time to repay it, it’s  then treated the same as any other debt, such as credit cards, car loans or  mortgages, said Sarah Davies, research executive with VantageScore.

“Don’t borrow too much, and when it’s time to pay it back, pay it on time,”  Davies said.

What is considered a good generic credit score?

It depends on the scoring system. Scores using the FICO scale (300 to 850) are  usually considered good if they are over 700.

However, a score using the VantageScore scale (501 to 990) are usually  considered good if they’re over 800. VantageScores also give the consumer a  letter grade of A,B, C, D or F.

VantageScore is a generic credit scoring model created by the three credit  reporting companies, Equifax, Experian, and TransUnion.

With VantageScore, lenders can accurately score millions of Americans who  previously were unscorable, opening doors for many creditworthy borrowers.

Another tip to keep your score high is to avoid loading up on lots of debt  before closing on a mortgage. Many lenders pull the score right before the  closing.

“A lot of people get excited and run out and buy a lot of things for a  new home and that has the high probability of negatively affecting the  credit score,” Burns said.

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