How Well Do You Know Credit? Survey Results

Credit is a powerful tool for achieving financial goals such as purchasing a car or owning a home, but it is a foreign concept to many consumers. Credit is viewed with skepticism by many young adults in particular. As a result, they frequently misunderstand the fundamentals of credit and why it is important.

Take a look at this. Sixty percent of Millennials polled in a Credit Sesame survey in 2016 said they purposefully avoided using credit cards. Furthermore, they didn’t view that choice as harmful to their credit or finances. Their main reasons for resisting credit were a general distrust of credit card companies, a perceived lack of friendliness on the part of banks, and a desire to avoid debt.

We wanted to know what would motivate Millennials to get a credit card in another Credit Sesame survey. Twenty-two percent said they would be willing to use credit if they could set their own APR or spending limit, and 13% said a generous rewards program would be enough. However, 4% would not budge from their decision to refuse credit cards.

Because April is Financial Literacy Month, we conducted another survey to assess consumer understanding of the most common credit principles. The survey, which was conducted on Twitter, included two questions:

  • What has the greatest influence on your credit score?
  • What is the most effective way to raise your credit score over time?

The findings indicate that some consumers still have a lot to learn about credit scores. We also polled Credit Sesame staff members to see how knowledgeable they are about credit. Here’s what we discovered.

Most customers understand that payment history takes precedence.

The first question we asked on Twitter was which factor has the greatest influence on credit scores: payment history, credit card balances, student loan balances, or income.

55% of Twitter users who responded correctly selected payment history. Credit card balances were cited as having the greatest impact by nearly a third of respondents (27%). Only 10% said student loans, while 8% said income. While more than half of those polled chose the correct answer (payment history), the results show a significant lack of understanding of how credit scores are calculated.

Different models (such as FICO® and VantageScore®) are used to generate credit scores, but the most influential factor is payment history. Payment history, for example, carries more weight in FICO® scores than credit utilization ratio or credit history age. VantageScore® is comparable.

Do you know how to improve your credit score?

Surprisingly, 71% of Twitter users who responded said the best way to improve your credit score was to always pay your bills on time. Thirteen percent said paying off student loans was the best way, and 11% said closing unused credit accounts was the most beneficial. Only 5% said getting a new credit card was the solution.

Two aspects of the Twitter results stand out. To begin, only 55% believed that payment history had the greatest impact on their credit score, but 71% believed that paying bills on time was the best way to improve their scores. This suggests that consumers understand the importance of payment history on some level, but they may not fully comprehend how or why it affects your credit.

Second, some of the Twitter users who responded to this question chose actions that can be detrimental to your score rather than beneficial. Your credit score, for example, is influenced in part by your credit utilization ratio. This is the amount of debt you have compared to your credit limit. This percentage should be as low as possible. Closing accounts while carrying balances on other cards may have a negative impact on your score if your utilization ratio rises.

Applying for new credit can also lower your credit score. A hard inquiry appears on your credit report every time a lender pulls your credit history. Each difficult question can deduct a few points from your total. From the date of each inquiry, your score will gradually recover over the course of a year.

How the Credit Sesame team fared

When we asked Credit Sesame staff members our questions, the answers were very different. More than 85% believe that payment history has the greatest influence on your credit score, and more than 90% believe that paying bills on time is the best strategy for improving credit.

Does this imply that you should join the Credit Sesame team in order to improve your credit IQ? Unless you’re looking for a fun place to work where credit is emphasized, no.

Even Credit Sesame employees were unaware that FICO® credit scores ranged from 300 to 850.

Managing your credit score is all about how well you understand credit and which factors have the most impact on your score. According to the Twitter survey, the importance of payment history is fairly well understood, but consumers may be unaware of the importance of credit utilization, debt repayment, and applying for new credit.

Why avoiding credit cards can backfire

According to the findings of the two previous surveys, young adults avoid credit cards more than their older counterparts. On the one hand, it’s understandable for Millennials to be concerned about debt. Total student loan debt in the United States is $1.3 trillion and rising. Among Credit Sesame’s over 8 million members, those aged 18 to 34 owe a total of $10.5 billion in loans. The average balance for 25 to 34-year-olds, who account for 41% of the debt load, is more than $21,000.

The issue is that Millennials may be hurting themselves financially by avoiding credit cards. Credit is a valuable financial tool that, when used correctly, can save consumers a significant amount of money in the long run. When you have a good credit score, you can qualify for loans or lines of credit more easily and at better terms (think lower interest rates). A lower interest rate translates into a lower cost for the credit you use. In the context of a mortgage, a single percentage point can easily add up to tens of thousands of dollars or more over the loan’s life.

In your twenties, you might not be thinking about mortgage terms. However, thinking about credit now will help you build the good credit you’ll need later on when you’re ready to buy a house. Mortgage lenders want to see a long credit history and a high credit score, both of which indicate that you manage your money responsibly. That is why you must establish a solid credit foundation early on.

How to Understand Good Credit

When it comes to improving your credit, being aware is essential. According to Credit Sesame data, members who check their credit more frequently see a greater improvement in their scores over time than those who do not. That implies that proactively checking your credit reports on a regular basis (to understand what’s in your report and the habits that lead to better credit) can have a tangible payoff. If you aren’t already a Credit Sesame member, sign up for a free account now.

You’re in luck if you didn’t get a chance to participate in this survey. Credit Sesame has created a new survey to assess consumers’ credit knowledge. Take the survey now to see how your credit knowledge stacks up.