First, the good news: In the past year, consumer knowledge about credit scores improved significantly, including awareness of how scores are calculated, the importance of checking them, what represents a good score, and what service providers use these scores.
But most consumers still don't know how much they can be penalized for bad scores, what things can lower their scores, and what a waste of money it is to buy credit repair services -- which tend to over-promise, over-charge, and perform services consumers could do themselves.
Those are the mixed findings of the second annual survey on credit scores released yesterday by VantageScore Solutions LLC, the company behind the VantageScore credit-scoring model, and the Consumer Federation of America.
Stamford, Conn.-based VantageScore owns the intellectual property rights to VantageScore, a generic credit scoring model created in 2006 by the Big Three credit reporting agencies: Equifax (NYSE: EFX), Experian (LSE: EXPN), and TransUnion, which abandoned plans for an IPO last year.
The credit reporting agencies teamed up to create their own credit scoring model to compete with FICO's (NYSE: FIC) FICO Score, the best-known and most widely used credit score model in the United States. By all accounts, they've had only fair success. The VantageScore represents about 6% of the market, according to documents filed in a federal lawsuit between the credit reporting agencies and FICO.
What difference does it make what score is used? To a borrower, not much, as long as you understand there is a difference in scoring. FICO scores are based on a range of 300 to 850. A VantageScore ranges from 501 to 990.
The net effect: A VantageScore tends to make you look like you have a higher score than a FICO score. You may be impressed, but potential lenders and others who rely on credit scores -- landlords, home insurers, and cellphone companies -- will know the difference, because most of them still rely on FICO scores.
But no matter what scoring model is used, the goal is the same. You want to get the highest possible score. Higher credit scores make it easier to be approved for credit and to get the lowest available interest rates.
Credit scores are calculated from information in your consumer credit reports. So the best way to get a high score is to -- duh! -- manage credit responsibly, and check your report for accuracy at each of the major credit reporting agencies every 12 months. (You can check your credit report free of charge at AnnualCreditReport.com, but you will have to pay $10 or so if you want to know your score.)
A few years ago, Experian analyzed the differences between consumers in high and low credit score ranges. It compared the data of more than 1.3 million consumers scoring less than 660 to those scoring 720 or higher in five main areas: monthly payments, amount of debt, percentage of available credit used, number of late payments in the past six months, and the number of inquiries during the past six months.
Low-scoring consumers had a significantly higher incidence of late or missed payments, even though they had lower average monthly payments than higher-scoring consumers did.
The study found that high-scoring consumers owed twice as much and paid, on average, 2.5 times more for monthly debt than low scoring consumers pay. But the biggest difference: High-scoring consumers use a lower percentage of their available credit -- nearly 10 percent less -- than low-scoring ones.
In general, it's better to keep the ratio between the outstanding balance and available credit as low as possible, and never more than 25%. Having a very high balance-to-limit ratio adversely affects your credit score.
What's the impact of a low score? It can be significant. On a $20,000, 60-month auto loan, a borrower with a low credit score is likely to pay at least $5,000 more than a borrower with a high credit score, the Consumer Federation of America reports. Low scores can have even greater impact on a mortgage -- and on those ever-popular, privately issued student loans.