Lower credit scores cost consumers, survey says

Americans can save billions of dollars annually on credit card and other interest payments by raising their credit scores, but many consumers still don’t know enough about the complex numerical values that represent their credit risk.

Although awareness of credit scores has increased in the past year, it remains poor, the Consumer Federation of America and Seattle-based thrift Washington Mutual Inc. found in an annual survey released Thursday.

The scores, which generally range from 200 to 800, play an increasingly important role in consumers’ finances.

They are used by lenders to determine rates for loans, credit cards and other financing. Utilities, landlords and employers also are increasingly checking credit scores.

Washington Mutual estimates that, because financial institutions offer lower interest rates to consumers with better scores, consumers could reduce credit card finance charges by an average of $105 annually if they boosted their credit scores by 30 points. If all consumers did so, total annual savings would reach $28 billion.

One way to raise a credit score is to avoid exceeding the maximum limit on a credit card, the study said.

But credit card issuers have recently cut limits on many cards as financial institutions seek to reduce their credit risks. That can hurt credit scores because the scores are based partly on the balance a consumer carries on a card compared with its overall limit.

For example, if a consumer has charged $4,000 on a card with a $10,000 limit, the consumer’s so-called utilization rate is 40%. But if a card issuer reduces the limit to $5,000, that bumps up the utilization rate to 80%, which could lead to a lower credit score.

The Consumer Federation recommends credit card users keep utilization rates below 50%, said Stephen Brobeck, executive director of the group.

Anthony Vuoto, president of WaMu’s credit card services unit, downplayed the consequences of the reduction of credit limits, saying it probably affected only a “small minority” of consumers.