What you don't know about credit scores could hurt you

May 16, 2012 at 8:28 AM ET

Paul Sakuma / AP /
A bad score could cost you a job or a loan. That's why it's so important for you to understand how credit scoring works.

Your credit score, which is based on your credit history, can have an enormous effect – positive or negative – on your life. A good score could save you thousands of dollars a year in interest. A bad score could cost you a loan. That’s why it’s so important for you to understand how credit scoring works. 

A new surveyby the Consumer Federation of America (CFA) and VantageScore Solutions shows overall knowledge about credit scores has improved significantly in the past year. But the results also make it clear there’s still a long way to go.

Many consumers still need to learn about what scores represent, how to get access to them and how to improve them,” notes CFA’s executive director Stephen Brobeck.

Fewer than half (44 percent) of those surveyed are aware that a credit score typically measures risk of not repaying loans, rather than the amount of debt or financial resources you have. Only 29 percent know how costly a low score can be.

“Very few people understand that on a conventional new car loan ($20,000 for 60 months) if they have a low score that will cost them $5,000 more in additional interest charges than a borrower with a high credit score,” Brobeck says.

One of the most troubling findings: more than half the respondents still think, incorrectly, that a person’s age and marital status are used to calculate credit score. One-fifth (21 percent) incorrectly believe ethnic origin is a factor.

“Your ethnicity isn’t even on your credit report, so it’s impossible for it to be a factor in computing your credit score,” explains John Ulzheimer, president of consumer education at “Your credit score is not influenced by anybody but you. Your own actions completely determine the score.” 

One key area of misunderstanding: the impact of multiple credit checks while applying for a loan during a one to two week period. Few people (only 9 percent) know that shopping for a loan like this will not lower their credit score. 

“If people are not shopping for credit because they think it will negatively impact their credit score, that’s not good,” says Adam Levin, chairman of “People need to shop around and get the best deal at the best rate. That’s good for the consumer and good for the economy.” 

Despite years of warnings about credit repair companies, more than half the people contacted (51 percent) believe that these companies are “always” or “usually” helpful in correcting credit report errors and improving scores. That’s troubling. 

“Experts around the country are in almost complete agreement that these credit repair companies overpromise, charge high prices and also perform services that consumers could do for themselves,” CFA’s Brobeck warns. 

The Consumer Federation of America says there are ways to raise your credit score. 

  • Consistently pay your bills on time every month.
  • Don’t max out, or even come close to maxing out, your credit cards or other revolving credit accounts.
  • Pay down debt. Don’t just move it around.
  • Don’t open a lot of new accounts rapidly.
  • Check your credit reports from each of the three big credit reporting agencies throughout the year to make sure they are error-free. You can get one free copy from each bureau every twelve months. Use this website -- -- or call 877-322-8228. You must give your Social Security number since this is how credit reports are tracked.

How much do you know about credit scores and credit reports? Take the CreditScoreQuiz. There is also a Spanish language version.