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Would You Pass the Credit Score Knowledge Quiz?

The Consumer Federation of America (CFA) and VantageScore Solutions, LLC jointly release a survey each year to test consumer knowledge of how credit scores work. Disturbingly, this year's survey shows that the average consumer's understanding of credit scores has slipped by a significant factor. This is a serious problem because if you don't understand how credit scores work, you could unknowingly take actions that will destroy your score.

What is a credit score?

A credit score is a way of showing lenders how likely you are to repay a loan (and therefore how large a risk you present). Understanding the purpose of the credit score is necessary if you want to consistently improve and maintain a high score, yet only 38% of survey respondents were able to answer this question correctly – down from 43% on last year's survey. Similarly, only 64% of respondents knew that people have more than one credit score, as opposed to the 69% who got this question right last year. Not only do scores tend to vary across the three credit bureaus, but there are two different major scoring models: FICO and VantageScore. The scoring models use slightly different factors and weigh them differently, so your FICO score is unlikely to be the same as your VantageScore even if the two scores are looking at the exact same information from your credit report.

Image source: Getty images.

The cost of poor credit

Having a low credit score tells prospective lenders that there's a good chance you won't pay off the money that they lend you. To balance out the higher risk that such a borrower represents, lenders will charge more on the loan (if they're willing to extend it at all). In fact, a low credit score means that the typical auto loan would come with additional charges in excess of $5,000. Unfortunately, only 18% of survey respondents realized this, in comparison with 25% of respondents from the previous year's survey. If you do have a low credit score, it's important to budget for those added expenses when you're pricing out a big purchase that will require a loan.

Improving your credit score

Fortunately, survey responses showed that most people are aware of the biggest events that cause credit scores to take a serious hit -- personal bankruptcies, missed loan payments, and high credit card balances. Respondents also knew that two of the best ways to create or maintain a high score are making loan payments on time and keeping credit card balances low. However, there are some important gaps in consumer knowledge of credit score repair strategies. For example, only 47% of survey respondents correctly said that credit repair companies rarely if ever improve one's credit score (down from 54% last year). And only 68% of respondents knew that it's very important to check your credit report's accuracy at all three major bureaus, as opposed to 73% from last year. Interestingly, the number of respondents who say they've checked at least one of their credit scores in the past year has gone up 2% from last year, to 56%.

Income matters

Perhaps the most worrisome finding of the survey is that higher-income respondents were far more knowledgeable about credit scores than lower-income respondents. Yet it's much more important for a low-income consumer to have a good credit score, since poor credit is so expensive. For example, if you're on a tight budget, balance transfer offers can be a great way to pay down a load of credit card debt. They reduce or even cancel out interest charges and keep the debt from growing too much while you're trying to get rid of it. However, if you use balance transfer offers without also making significant progress in paying down the debt, all you're doing is moving the debt around – which does your credit score (and your budget) absolutely no good.

Test your knowledge

You can take the survey quiz yourself at the Credit Score Quiz website, and see how well you understand credit scores and how they work. The site also provides further resources that you can use to expand your understanding for the questions that you missed. If your credit scores aren't where you'd like them to be, a little extra knowledge and a good strategy might be all you need to send them climbing.

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