Many Americans are unaware of the costs of bad credit, survey shows

Credit scores are easier to access than ever, but according to a new NerdWallet survey, 11% of Americans have never checked theirs.

Harris Poll and NerdWallet surveyed more than 2,000 Americans about their knowledge of bad credit and credit scores. We found widespread misconceptions about credit scores and the factors that influence them. We also learned that many Americans don’t understand how having bad credit can affect their lives.

Having bad credit can affect your everyday life

Most people know that their credit scores affect their ability to get approved for loans, as well as the terms of those loans. But you don’t have to apply for a loan to feel the effect of bad credit. Many Americans don’t realize that their credit may be checked for reasons that have nothing to do with borrowing money.

According to NerdWallet’s survey:

• Almost one-quarter of Americans (23%) don’t know that a person’s ability to rent an apartment might be negatively affected by having bad credit.
• Nearly 45% don’t know that those with bad credit might pay more for car insurance.
• About half of Americans (49%) don’t know that having bad credit can limit a person’s cellphone service options.
• More than half of Americans (52%) don’t know that people with bad credit might have to pay higher utility deposits.

The two most effective ways of building your credit score are paying all your bills on time and limiting the amount of available credit you use. This means that if your credit limit is $5,000, you should avoid having a balance of, say, $4,500 at any one time. It’s best to keep your balances at 30% or less of your available credit.

There are many credit scores; know where to look

Consumers can have many credit scores. The scores differ according to who’s doing the calculating, such as a lender or a credit bureau, and why. There are different scoring models for mortgages, car loans and so on. But about a quarter of Americans think a person has only one score, possibly because “credit score” is often referenced in the singular.

About two-thirds of Americans think a person’s credit score is listed on his or her credit report. Reports don’t include scores, but there are multiple free sources for scores, including credit card issuers and sites such as NerdWallet. You can request your free credit reports once a year from AnnualCreditReport.com.

Credit misconceptions abound, but knowledge is power

Misconceptions about credit scores aren’t the only reason someone has bad credit. But when building credit, it helps to understand the basics. Here are a few common misunderstandings from the survey:

• About 40% think carrying a small balance on credit cards helps a person’s scores, but you don’t need to carry a balance from one month to the next to show that you’re using credit. Use your cards regularly, but pay your balance in full by the due date to avoid interest charges.
• About 10% think everyone starts out with a perfect credit score. Unfortunately, when building credit for the first time, you have to work your way up. You don’t start at the top.
• About 20% believe that a credit score above 600 qualifies a person for any credit card he or she wants. However, a score at that level is below average and won’t qualify you for most credit cards. According to our analysis, consumers with excellent credit have access to almost eight times as many credit cards as those with below average or bad credit.

For more survey results, tips on building your credit and the complete study methodology, check out the full study.

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