Consumers Could Save Billions by Raising Credit Scores

Even though general understanding of credit scores improved over the past year, many consumers still don't understand the financial implications of a low score. The second annual consumer credit score survey commissioned by CFA and Providian revealed that if consumers were to take steps to increase their credit scores by 30 points, they would save an average of $76 annually--or about $16 billion in total--on lower credit card finance charges alone.

Your credit score--a three-digit number ranging from 300 to 850--is a measure of your credit risk. The current U.S. average is roughly 723. For those individuals whose scores fall short, the stakes are high.

Lower credit scores may mean you're denied access to credit, insurance, electric and telephone service, a rental unit, and even a job. It also translates to higher interest rates. Fair Isaac's website lists an example of a $150,000, 30-year, fixed-rate mortgage. Consumers with credit scores over 760 may be charged, say, a 5.42% rate with monthly payments of $844, while consumers with credit scores below 620 may be charged a 7% rate with monthly payments of $998. That's an annual difference of $1,848.

How can you raise your credit score?

• Pay all bills regularly and on time.
• Don't max out credit cards or other revolving credit.
• Pay off debt, don't move it around.
• Don't open many new accounts rapidly.
• Keep your utilization rate—balance-to-limit ratio, or percentage of available credit being used—under 50%.
• Check your credit report and correct errors.

Consumers have access to one free credit report per year from each of the three major credit-reporting agencies. This has helped to raise awareness of credit scores, but not enough, according to the survey. More than three-quarters (76%) of respondents mistakenly believe they have a right to obtain their credit score for free once a year. You can purchase your credit scores from the websites of Experian, TransUnion, or Equifax for $5 to $7.