The exact intricacies of a credit score continue to be one of the most confusing financial concepts for Millennials.
This elusive three-digital number holds the power to some of the most financially expensive purchases in a consumers life, including a house, and yet according to a recent poll from LendEDU, young American consumers only have an intermediate understanding of that all-important number.
LendEDU polled 500 millennials between the ages of 17 and 37 to test their knowledge of credit scores, and interestingly enough, the respondents weren’t too far off in describing their credit score range compared to what their actual credit score is.
The one cohort that did struggle, however, was the low end of the credit score spectrum, as seen in the graph below. More millennials actually had "poor" credit scores than those who described their credit scores as "poor."
The struggle with credit scores mostly happens when it comes to knowing the factors that go into calculating a credit score.
The poll found that 43.69% of millennials believe that you can improve your credit score by increasing your credit utilization, while 36.27% believe their credit score could be improved by maxing out, but paying a credit card on time.
LendEDU cautioned borrowers to not do the previous two things. “One can only hope that the nearly 80% of millennials that gave the two aforementioned answers are not actively practicing those two behaviors in an attempt to increase their credit scores,” it stated.
Only a small 17.23% gave the correct answer and knew they had to decrease their credit utilization in order to improve their score.
Other key areas of confusion include that 8.42% of poll participants believe race is included in calculating a credit score, while another 8.22% say gender factors into a credit score.
Plus, 8.82% of millennials think that their political affiliation counts toward their credit score.
But all of this is wrong, with none of these personal traits included in formulating a consumer's credit score.
One area respondents got right is length of credit history. Approximately 72.14% of millennial respondents were able to correctly state that age of credit history is used in the calculation to determine credit score. This is actually true. As your credit history grows older, your credit score will rise with it.
LendEDU also set the record straight on the need to carryover debt. When asked if you need to carryover debt month-to-month in order to have a good credit score, 27.66% of respondents wrongly answered, "Yes, carrying debt is necessary for a good credit score." Carrying debt is NOT necessary to develop and maintain a good credit score.
The report clarified that while taking on debt can be effective if consumers want to build good credit quick, they can also build good credit by keeping a low credit utilization and paying off your balances in full each month.
For those who want to now test their knowledge of credit scores, check out this past credit score quiz from HousingWire. Think twice before thinking you’re an expert. Few people aced the quiz.
The chart below helps display all the data listed above.