New report: Consumers have an overly rosy view of their credit scores

Despite news of several big banks offering credit cards to consumers without traditional credit scores or credit history, the credit score as we know it isn’t going away any time soon. How much do consumers really know about the inner workings of their credit scores and what factors affect them, whether positively or negatively? To dig deeper into this topic, Elan and PYMNTS surveyed a sample of over 2,000 consumers in the Credit Score Literacy and Building Credit Report. The report explores consumers’ perceptions of credit scores and plans around improving them. The report found that there is some confusion around credit scores as well as behaviors that improve on or detract from one’s credit score. In addition, the report highlighted the need for education and tools that can help consumers monitor and improve their credit scores.

One of the most compelling findings of the report was that consumers have false perceptions about their current credit scores, as 70% of consumers surveyed in the report thought their credit scores were “above average” while in fact only 45% of them have scores over 751 (the above-average threshold according to national credit reporting data). Perceptions of below-average scores were also skewed, with only 8% of consumers reporting they believed their credit scores were “below average.” In reality, 21% of those surveyed had a score below 600, the threshold for below-average scores.

Interestingly, Gen-Z and paycheck-to-paycheck consumers possessed the greatest knowledge gap when it came to actual vs. perceived above-average credit scores, with a 33-percentage point difference. While respondents agreed that paying bills on time and having good credit history was key to a higher score, there was confusion around other factors related to the effects of certain actions on creditworthiness. For example, 40% of respondents said that spending close to their credit limits will improve their credit scores (21 percent) or are not sure of its impact (19 percent). 39% of respondents believed that having debt on one credit instrument such as a credit card versus multiple credit instruments would improve their scores, while 33% thought it would make their scores worse.

This discrepancies in these beliefs highlight the need for credit education tools, which is an opportunity for credit unions and credit card issuers to step in. Consumers benefit from tools that allow them to easily track their scores and break down factors that most affect their scores, such as making payments on time, keeping a certain number open, or maintaining low balances. Tools can offer additional insights into credit history and how to improve scores and can alert to potentially fraudulent activity.

Evidence points to consumers being receptive to these types of credit monitoring and improvement tools, as the report also found that 62% of consumers are interested in improving their credit scores, but many are unsure about how to go about it. In addition, more than one-third of consumers would consider switching their current credit cards for those that offer tools to monitor and improve their credit scores.

Consumers view credit cards as a tool to build and expand their credit histories. However, credit unions wanting to offer robust credit card products to members have a lot to consider when it comes to risk, cost, and ongoing investment. The allure of potential fee and interest income gained by offering a suite of credit cards to members may lose its luster when all the costs of running the program are considered, even those not readily apparent. Elan’s recent paper, “Evaluating a Credit Card Program’s Profitability: Fee Vs. Interest Income” discusses the ins and outs of costs related to credit card program income types and factors to credit unions should consider when deciding whether to run a credit card program in house or outsource to an agent provider.  

The research in the Credit Score Literacy and Building Credit Report illustrates the need for clarity around credit scores, what factors affect them, and how consumers can take active control over their credit histories and futures. In order to help with this, credit unions and credit card issuers can provide tools such as credit score tracking, fraud alerts, and more to empower members to be in-the-know about their credit score. By providing these tools, credit unions will reap the benefits of an engaged member and a strengthened member-credit union relationship.

Read the full report here.