Nearly 40% Of Americans Still Don't Know How Credit Is Scored

Are credit scores a mystery to you? Do they seem like random numbers generated by bureaucrats armed with dartboards and Ouija boards?

A recent survey by CompareCards.com finds that 37 percent of Americans have no idea how their credit score is calculated. Worse yet, another 14 percent wouldn't indicate whether they knew how their credit score worked — meaning that just over half of Americans are not confident that they properly understand credit scores.

If you don't know how a credit score works, how can you tell whether you're doing the right things to improve your credit standing? You can always try a tool that Americans used before the invention of the credit score – common sense. A different survey question suggests that most Americans still grasp good credit principles, even if they don't fully understand credit scores.

When asked what the biggest factor was in determining a credit score, nearly half of respondents correctly chose how often you pay your bills on time. Another one-third of respondents chose the amount of your debt relative to your available credit. Otherwise known as your credit utilization, this factor is also very important in calculating your credit score.

"They may not be confident about it, but many Americans seem to understand credit better than they think they do. Even though nearly 4 in 10 Americans said they were clueless about how credit scoring works, more than 80% of Americans chose one of the two best answers when asked about the biggest factor determining their credit score. That's a sign that people at least have a feel for the basics of credit scoring," says Matt Schulz, Chief Industry Analyst at CompareCards.

Three other primary factors in your credit score calculation: the length of your credit history, how many recent credit applications you've submitted and how many different types of debt you have.

All credit score factors are included in your credit report — a compilation of all of your credit and loan transactions. Creditors report your activity to the three main credit reporting agencies (Experian, Equifax, and TransUnion). Your credit report is regularly updated to reflect new information, and your credit score may change as a result.

Lenders use credit-scoring systems that distill this information into a single number that provides an overview of your creditworthiness. The two primary scoring systems, FICO and VantageScore, both use scales from 300 to 850. Your credit score can vary based on which scoring system is used and which credit reporting agency's information is used for calculations.

"People get intimidated by credit and tend to overthink it," explains Schulz. "It's really about doing a few specific things well over and over for many years. If you pay your bills on time every time, keep your balances low and avoid applying for too much credit too often, your credit is going to be just fine."

If your score from one source is unusually different from others, it may indicate an error in one of your files.

Criminals with your stolen identity can make fraudulent charges on your existing accounts, or even establish fake accounts in your name. If you don't understand what affects your credit score, you may not realize that identity theft is dropping your score until you're confronted with unpaid bills and ruined credit. The sooner you detect that your credit score doesn't match up with your credit activity, the more you can limit the overall damage.

Credit scores aren't a replacement for common sense when making credit management decisions. However, a credit score is an excellent tool to help you track progress and alert you to problems. If your credit score changes, do you know why?

Credit cards can be an effective way to manage money, improve credit, earn points, and travel with perks if used the right way. Benzinga's personal finance staff provides tips on using credit cards effectively.

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