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Most of us aren’t clueless about credit scores, but we may be making costly mistakes. A recent annual survey by Consumer Federation of America and VantageScore Solutions about consumer credit knowledge found that a “large majority of Americans know a great deal about credit scores.”

But it also identified some common misconceptions about credit that often trip people up. Here are three of them.

1. How Inquiries Really Work

When someone requests your credit report, or a credit score generated from your credit report data, an inquiry is created on that credit report. Multiple recent inquiries may cause your credit scores to drop. But there are different types of inquiries, and some don’t affect your scores at all.

According to the credit knowledge survey, only 7% of respondents knew that multiple inquiries will not lower one’s FICO or VantageScore credit score if those inquiries are made during a one- to two-week window.

In the case of FICO scores, inquiries from auto loan, mortgage or student loan applications are counted as a single inquiry if they occur in a two-week or 45-day period (the exact time period depends on which version of the FICO model is used). In the case of the VantageScore, there is a rolling two-week period in which any inquiry of a specific type is counted as one. (Unlike the FICO model, this one also applies to credit card-related inquiries). If you’re not confident you understand which types of inquiries impact your credit — or how they do — read this guide to credit report inquiries.

2. Who’s Looking at Your Credit Scores

In the credit knowledge survey, consumers were asked which of the following six types of businesses might use credit scores:

  • Credit card issuer
  • Mortgage lender
  • Landlord
  • Home insurer
  • Cellphone company
  • Electric utility

Only 18% of millennials, and 32% of older consumers, correctly identified the fact that all six of these businesses may check credit. While most consumers understand that credit card companies and mortgage lenders use credit scores, fewer understand that utility or cellphone companies may run credit checks, usually to determine whether prospective customers must pay a deposit. (Cable companies also check credit to decide whether to collect a deposit.)

3. The Money You Can Save With Good Credit

No doubt you’ve heard that a good credit score can save you money. But it’s easy to underestimate how large that amount can be.

The credit awareness survey asked this question: “On a $20,000, 60-month auto loan, about how much more would a borrower with a low credit score pay than a borrower with a high score? Would you say under $1,000, $1,000 – $3,000, $3,000 – $5,000, or more than $5,000?” Only 16% answered correctly: more than $5,000.

Why aren’t most people aware of the savings they can achieve if they build and maintain strong credit? It may partly be due to the fact that we often think in terms of monthly payments. Saving $50 a month on a mortgage payment may not seem like much, for example, but over the life of the loan (360 payments for a 30-year loan) that’s $18,000! In a recent article on the Credit.com blog, we demonstrated how much someone can save on a 30-year home loan of $200,000 if they have strong credit scores, and the difference ranged from $43,000 to $63,000!

How to Get Smarter About Credit

When it comes to credit, knowledge isn’t just power; it can also mean real savings. So check your free annual credit reports. The credit awareness survey found that those who have obtained their credit reports are more knowledgeable than those who haven’t. This guide will help you read your credit reports.

“Those who are interested in their credit reports are probably also interested in their credit scores,” noted CFA’s Brobeck. “It’s so easy to go online and get your free reports that this action likely motivates people to learn more about credit scores.” CFA and VantageScore offer an educational website, CreditScoreQuiz.org to help consumers test their knowledge and learn more.

Another way to learn more about your credit? Get your free credit scores. Consumers can also get two free credit scores, including a VantageScore, at Credit.com, where they will also get a clear explanation of the factors affecting their scores and an action plan for their credit.

More on Credit Reports and Credit Scores:

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  • heavyw8t

    It would seem that a great solution for the masses would be that somehow there would be just one “credit model”. How can various lenders justify having the option of what to pick and choose to consider when deciding to offer credit? People are either responsible for their bills or not. As closed minded as lenders are about situational circumstances, such as factoring in that half the work in the USA is now being eliminated or outsourced, and stay hard and fast. I am very close to one specific situation where a very good credit risk saw his job vanish and his credit was ruined. Had the lenders considered the job loss and deferred the debt for just 4 months, that person would have not been in arrears and seen his credit ruined by no fault of his own.

    Education, such as what we get here, is a huge part of it. I have learned a great deal about the inner workings of credit here, such as how inquiries are applied, the value of leaving old accounts open, and keeping an eye on your credit report. I had many inquiries in a 15 day window when buying a car in a rush in 2013. Though those inquiries should only have counted as one inquiry given the time window, when those inquiries became 1 year old, I saw a huge jump in my score. If inquiries only count for a few points, that is not consistent with them being grouped and counting as one inquiry. My score went up more along the lines of “a few” x 16.

    With that knowledge, though, comes more questions. One of those questions centers around the repeated suggestion to “check your free credit scores”. You can only get one free credit report per year, and 12 months is a rather long window to not know about changes on your report. How often does that report change to where it is prudent to view it more than once per year? At $40 a pop, that gets expensive. I am at a loss as to why there are countless “credit models” that find the reported score so drastically different. I recently paid for my 3 bureau report and scores. 2 were identical. One was 67 points lower. WHAT can one bureau see so differently, given that my accounts are what my accounts are n matter who is viewing them, that they score me 67 points lower? All the information matched exactly, yet that one bureau (TransUnion) reported my score to be 67 points lower than Equifax and Experian. That is just not right. If I have 10 accounts showing, those 10 accounts show exactly the same to all 3 bureaus. This is why I suggest that there be some kind of arrangement where there is one standard model used across the board.

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