Testing Your Knowledge About Credit Scores
I came across a terrific online credit repair software quiz created by the Consumer Federation of America (CFA). The quiz tests your knowledge about various aspects of credit scores – how they work, how they are calculated, how to lower them, etc. Everyone should take this test, because many of us are spending too much for credit. You can simply buy less on credit, but a better idea is to reduce your cost of credit. By raising your credit score, you are more likely to be charged a lower interest rate on purchases and cash advances. Before you can raise your credit rating, you have to understand how it’s calculated, which is where the quiz comes in.
At this point, 22,624 people have completed the online test, and 21,571 passed, a good rate. That means test-takers knew the basics:
- credit scores are used when you apply for any type of loan, and
- paying bills late will result in a lower credit rating.
However, there are some popular misconceptions that should be discussed. For instance, ten percent of test-takers didn’t realize that student loans affected their credit scores. That’s a big problem, because Americans have more student loan debt than credit card debt, according to the Federal Reserve Bank of New York. Then there was a tricky question which showed that many participants underestimated the ultimate cost of a poor credit score relative to a good one. The question asked about a 60-month $20,000 auto loan. The correct answer was that a poor rating would cost $5,000 over the term of the loan – many thought that the penalty was lower.
Another misconception is that credit scores are adjusted to reflect by the age, marital status or ethnicity of borrowers. This is illegal – credit scores do not discriminate. Finally, there was a lot of confusion about the free credit reports. Yes, Congress passed a law stating that a credit bureau must provide you with a free credit report once a year – which is good and you should take advantage of it to make sure there aren’t any mistakes. But such free credit reports do not provide credit scores – you have to pay for those. The credit scores, known as a FICO Score, was originally developed by a firm known as Fair Isaac, but has been generally adopted across the industry. The company is still in business and will sell you a report showing your credit score for $20.