How Many Americans Are Clueless About Their Credit?
The role of credit reports and how they affect credit scores remains a mystery for many consumers. In short, the report contains a significant amount of your financial activities, which then helps create your score. The exact formula for calculating credit scores is kept secret from the public, but we do have a general idea what helps or harms scores. Yet there are some serious misconceptions that Americans should not ignore.
Nearly a third of Americans might be using plastic incorrectly to raise their credit scores. According to a new survey from BMO Harris Bank, 30 percent of respondents across all age groups believe carrying a balance on their credit cards will improve their credit scores. Making matters worse, 39 percent of 18- to 34-year olds say the same thing. In reality, carrying a balance can actually lower your score, and is certainly not needed to build credit. These lessons don’t appear to take hold until much later in life. Only 18 percent of adults 55 and older say carrying a balance improves credit scores.
“Encouraging education around credit scores is a major focus for us, especially among the millennial population,” explained Alex Dousmanis-Curtis, Head of Retail Banking, BMO Harris Bank. “A credit score stays with you as you go through your financial life, and can impact major decisions. Our bankers regularly work with customers to better understand their score better, and in some cases, get it where it needs to be to purchase that home or buy that car.”
The FICO credit score, which ranges from 300 to 850, is the most popular score used in America. It’s based on five categories of credit data that comes from your credit report: payment history (35 percent), amounts owed (30 percent), length of credit (15 percent), types of credit (10 percent), and new credit (10 percent).
Payment history is the largest component and the reason why everyone in personal finance stresses the importance of paying your bills on time. Amounts owed is a close second, which provides a large incentive to pay off your credit cards each month.
You may feel like you don’t need a high credit score if you plan on avoiding debt forever, but it can also save you money when shopping for insurance or even help you land a job since a growing number of employers are requesting to see your credit report in hopes of learning more about your character. If you don’t trust yourself with traditional credit cards, you can still help build your credit with secured credit cards, which base your credit limit off the amount of cash you deposit ahead of time.
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