What You Don’t Know About Credit Can Hurt You

Learn About Credit and How to Avoid Credit Card Debt

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Credit Sesame discusses what Americans don’t know about credit.

Not everybody wants to be an expert on credit. However, there are certain basic facts that even a casual user of credit should know. Understanding a few simple things about how credit works can save you money throughout your lifetime. It can also help protect you from identity theft and other forms of fraud.

A recent Credit Sesame survey found that many Americans have some meaningful gaps in what they know about credit. Since what they don’t know can hurt them, this article discusses some of the misunderstandings about credit that the survey revealed. It also explains why getting the facts straight about credit is important.

Millions of people may have no idea what their credit score is

One thing that was obvious from the survey’s results is that some people pay more attention to credit than others. For starters, the survey asked respondents what their credit score was currently. 16.14% of respondents said they didn’t know.

To be clear, the question didn’t ask for a precise number. It gave broad ranges that would allow a respondent to generalize. Even so, 16.14% couldn’t even give a rough estimate of their credit score.

If that sounds like a relatively small percentage, keep in mind that if projected out over the adult population it would means millions of Americans have no idea what their credit score is.

In a related question, the survey asked people if their credit score had changed over the prior year. 11.52% of respondents to this question said they didn’t know.

In other words, a significant number of people have no idea what their credit score is or whether it’s going up or down. And yet, that information may impact their finances in important ways.

Why you should know about credit score

Not understanding your credit score and how to improve it can hurt you.

One explanation for why so many people have no idea about credit score may be that they don’t plan to apply for credit any time soon.

Too often, people don’t start thinking about their credit status until it’s time to apply for a loan or a credit card. Or worse, they don’t even think about it until they get turned down for credit.

Here are three reasons why having a clearer picture of your credit status is important at all times:

1. You can’t just turn good credit off and on like a light switch

It can take years to build or repair a credit history. If you wait until you’re about to apply for a loan or a credit card, you’ve probably left it too late to improve your credit much before that application is reviewed.

That review could affect the interest rate the lender gives you. Or it could result in that application being turned down.

With so much at stake when you need to apply for credit, it’s important to keep your credit history in good shape at all times – not just when you need to call on it.

2. Credit changes can affect your existing accounts

Even if you don’t expect to be applying for new credit, changes to your credit score can affect an existing credit card account.

While there are limits to how credit card companies can change the interest rate on existing balances, they can adjust rates for new purchases. Your credit score may be one factor in those adjustments.

Besides your interest rate, changes in your credit score may also affect your credit limit. Especially when the economy is shaky, credit card companies may decide to manage their risk by lowering the credit available to customers with weaker credit scores.

So, even if you haven’t applied for credit in years, a change to your credit score could impact how much you pay in interest and how much credit is available to you.

3. Credit scores can act like a burglar alarm for your finances

In today’s information-driven world, a thief doesn’t have to mug you on the street or break into your home to steal from you.

Very quietly, while your credit cards are still tucked safely away in your wallet, a thief may be using information about those cards to buy things with them.

Cyber thieves can also use information they’ve gathered about you to open accounts in your name. They use those accounts for their own purposes and don’t pay the bills. Eventually the accounts are closed and you’re left with demands for payment and damaged credit.

A sudden change in your credit score can be a warning sign that this kind of thing is going on. It can alert you to the fact that someone is using some of your information before too much damage is done.

Given how important credit scores are, it would help if people had a better understanding of what affects them. Unfortunately, the survey revealed some of the wrong ideas people have about what does and does not affect their credit history.

Wrong ideas about credit

Even people who think they know about credit make mistakes. Here are examples of some of the wrong ideas people have about credit:

  • Believing saving money affects credit scores. It doesn’t. Still, the Credit Sesame survey found that more than one in four people (27.42%) believe that saving money regularly will help their credit score. To be sure, saving money helps your overall financial situation. However, credit scores are focused on payment history, not savings.
  • Thinking that paying cash is viewed as a responsible use of credit. That’s wrong, and fortunately only 6.33% of survey respondents said using cash was the best way to build credit. Paying cash can certainly be a wise decision in some cases. However, cash transactions are invisible to the organizations that track your credit history.
  • Being afraid that having too many accounts will hurt your credit score. There can be in some truth in this, but it’s a balancing act. Opening too many accounts at once can be flagged as risky. However, credit score is also impacted by the percentage of your available credit that’s in use. So, having some additional credit available but not currently in use can help your credit score. In the survey though, most people were not able to identify that having three credit cards with low balances is better than having one with a large balance.

Credit health is very much like physical health. It starts with knowing what’s good for you, and then you make it pay off by practicing healthy habits on a regular basis.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

Survey methodology

The Credit Sesame Personal Finance and Credit Survey 2022 was designed and executed by Credit Sesame using the Momentive Inc. survey tool. General population data was collected online May 20-21, 2022. The survey sample comprised 1,222 U.S. residents aged 18 to 99 years balanced for age and gender using U.S. Census data. The sample data is accurate to within + 2.88 percentage points using a 95% confidence level.

Richard Barrington
Financial analyst for Credit Sesame, Richard Barrington earned his Chartered Financial Analyst designation and worked for over thirty years in the financial industry. He graduated from St. John Fisher College and joined Manning & Napier Advisors. He worked his way up to become head of marketing and client service, an owner of the firm and a member of its governing executive committee. He left the investment business in 2006 to become a financial analyst and commentator with a focus on the impact of the economy on personal finances. In that role he has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications.

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