Financial literacy isn’t widely taught in the American education system, leaving many consumers to figure out how to handle money by trial and error. So it’s unsurprising that, according to a NerdWallet survey, Americans lack some basic knowledge about credit cards and credit scores. But what they don't know could be hurting them big time.
NerdWallet commissioned an online survey, conducted by Harris Poll in February 2016, of more than 2,000 U.S. adults. We quizzed consumers on their knowledge surrounding credit cards and credit scoring. Take the quiz for yourself below, or jump to our findings:
Here’s what we found about the credit knowledge of Americans:
Most Americans don’t know the effect that many common actions have on their credit scores.
Only 9% know that most consumers have more than three different credit scores.
More than half (55%) don’t know when they start being charged interest on credit card purchases.
To add some additional context to our findings, we talked to Sean McQuay, NerdWallet’s resident credit card expert and a former Visa strategy analyst. McQuay provided insights about why the lack of basic credit card and score knowledge is significant so we could provide consumers meaningful advice for their financial lives.
Common but costly mistakes hurt consumers’ credit scores
A good credit score helps you get more favorable terms from lenders, including lower interest rates on loans and better rewards on credit cards. Good credit also could help you get lower insurance rates, rent an apartment and even land a job. Unfortunately, our survey results show that most consumers don’t know how common actions affect their credit, and it may be hurting their scores as a result.
Fact: Carrying a balance from month to month doesn't help you build credit
Survey says: More than half of Americans (54%) don't know that carrying a credit card balance does nothing to help a person's credit score.
Our expert says: “Using your credit card, or another type of credit account, is important to build a solid credit score. But the only thing carrying a balance will do is cost you money. Consumers who don’t pay their card off each month are charged interest on the average daily balance of said card. Sometimes interest charges are unavoidable, but you can’t pay for good credit via interest charges.”
Here’s what you should do: Pay your credit card bill in full each month, if possible. While using cards regularly is important to keep them open and active, it’s absolutely a myth that you have to carry a balance and pay interest on it to help your credit.
Fact: Closing an older card hurts, rather than helps, your credit score
Survey says: Nearly eight in 10 Americans (78%) don’t know that closing an older, paid-off credit card hurts their score.
Our expert says: “Closing an older credit card can damage your credit by reducing the amount of your available credit — which increases your credit utilization. Credit utilization is the second most important factor in your credit score, so the closure of a card can have a significant negative impact on your score. Unless your card has an annual fee and you aren’t using it, you shouldn’t cancel an older, paid-off card.”
Here’s what you should do: Keep your old account open and active. The easiest way to do this is by automating a small bill, such as a monthly subscription, to post to your old card, and then pay it off each month. Consider setting up auto-pay on this account to make it even easier. This will ensure your account isn’t closed because of inactivity.
If you’re sure you want to close an account, take these five steps before you do so to minimize any negative impact.
Fact: A late payment may be costly, but it probably won't hurt your credit
Survey says: Only 8% of Americans know how paying a credit card bill late affects their credit score.
Our expert says: “Eighty-two percent of Americans answered that paying a bill late will always hurt a credit score. But contrary to popular belief, a late payment doesn’t necessarily mean damage to your credit. If you pay within 30 days of your due date, the blunder most likely will not be reported to the credit agencies.”
Here’s what you should do: While you don’t have to pay your bill on time for a healthy credit score, you still should. Even if there isn’t a credit impact, most credit cards charge a late fee. Late payments also can result in the cancellation of an introductory 0% interest rate, an increased penalty APR applied to your account, or both. Check your card’s benefit statement for details.
Fact: Having multiple credit cards doesn’t directly affect your FICO score
Survey says: More than nine in 10 Americans (91%) don’t realize that having several cards doesn’t have an impact on their credit score.
Our expert says: “While every new card application can knock a few points off your credit score in the short term, having multiple cards doesn’t inherently help or harm your credit. In fact, there are some non-credit benefits to having multiple cards, including being able to maximize rewards earned and having a replacement if your primary card is lost or stolen. There's also an indirect credit benefit to having more cards — you'll enjoy a higher overall limit, which lowers your credit utilization.”
Here’s what you should do: We recommend having a minimum of two credit cards in case one is lost or stolen, or the network isn’t accepted by certain merchants. If you’re just starting out with credit cards, space your applications out by a minimum of six months to minimize negative credit impact.
Consumers are confused about what 'credit score' really means
You can get a credit score from a lot of places, but Americans aren't clear about the differences among them — or, in many cases, are not aware that there even are differences.
Fact: There are hundreds of credit-scoring models in use
Survey says: Only 9% of Americans know that most consumers have more than three different credit scores.
Our expert says: “The term ‘credit score’ is often said singularly, leading many to believe that they only have one score. And while some consumers know that there are different scores calculated from the data of the three credit bureaus, few know of the many scoring models that determine hundreds of credit scores.”
Here’s what you should do: Understand that there are many different scores, but they aren’t all equally valid. Most lenders use the FICO model, not proprietary scores calculated using a credit bureau's own model — and definitely not scores from free scoring sites. You can obtain your FICO scores by purchasing them from the three major credit bureaus — TransUnion, Equifax and Experian — or accessing them through one of the many credit card issuers that provide them free to cardholders.
Lack of credit card knowledge costs consumers in interest and rewards
When you use credit cards properly, you can earn rewards while enjoying certain purchase protections and what amounts to an interest-free loan. But according to our survey, consumers lack basic credit card knowledge that could cost them in several ways — including interest charges and lost rewards.
Fact: Interest doesn’t accrue right away, and doesn’t have to accrue at all
Survey says: More than half of Americans (55%) don’t know when they start being charged interest on credit card purchases.
Our expert says: “Three in 10 Americans think that interest starts accruing immediately after a purchase is made. This could explain the aversion to credit cards so many consumers have. But you don’t start accruing interest until the day after your payment is due, and you won’t owe any interest if you pay off your entire bill by the due date each month.”
Here’s what you should do: Pay your bill in full each month, and you won’t need to worry about interest payments. However, if you have to carry a balance, it’s important to understand how interest is calculated and how to minimize it.
Fact: Credit card issuers don’t make all their money from consumers
Survey says: Almost three in 10 Americans (29%) don’t know that credit card companies make money by charging fees to merchants that accept cards.
Our expert says: “Some consumers are anti-credit card because they feel that issuers are predatory and make all of their money from consumers paying interest and fees. While issuers do make a lot of money from interest charges and other fees, that’s not the only revenue stream from credit cards. Almost a third of consumers don’t realize that credit card companies also make money by charging merchants who accept credit cards a small percentage of each transaction.”
Here’s what you should do: Understand that credit card companies make their money from both consumers and merchants, and use this knowledge. By paying your bill in full each month, you’ll avoid paying interest, and you can save more money by avoiding unnecessary fees. You also can make the choice to pay cash when shopping at small businesses to limit the fees paid by your favorite mom-and-pop shops.
Fact: An annual fee makes economic sense for some cardholders
Survey says: Only 40% of Americans know that an annual credit card fee is worth paying if the rewards earned exceed the cost of the fee.
Our expert says: “More than a quarter of Americans (27%) think that an annual fee is never worth it, and for small spenders, this may be true. But a card with an annual fee can mean higher rewards and better perks for those who spend enough to justify it and, therefore, should be considered as a good plastic option.”
Here’s what you should do: Evaluate your own spending to determine whether it makes sense to pay an annual fee. If not, there are plenty of great rewards cards with no annual fee, but don’t dismiss the idea of an annual fee until you’ve done the math for yourself.
This survey was conducted online within the U.S. by Harris Poll on behalf of NerdWallet from Feb. 11 to 15, 2016, among 2,114 adults ages 18 and older. This online survey is not based on a probability sample, and therefore no estimate of theoretical sampling error can be calculated. For complete survey methodology, including weighting variables, please contact [email protected].