updated 9/21/2004 4:03:03 PM ET 2004-09-21T20:03:03

Americans are woefully ignorant about credit scores, a consumer group found, even though these measures of credit risk affect everything from the interest people pay on mortgages to whether they qualify for insurance.

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The Consumer Federation of America said Tuesday that a survey of more than 1,000 Americans found that only one-third correctly understand that credit scores indicate the risk of not repaying a loan. And more than half incorrectly believe a married couple has a joint credit score.

"Now that credit scores are increasingly used by utilities, insurers and employers, as well as creditors, it is essential for consumers to learn their score and what it means," said Stephen Brobeck, executive director of the CFA, a nonprofit advocacy group based in Washington, D.C.

"The cost of not knowing your score and its significance could be not only denial of credit but also difficulty obtaining needed services and even a job."

Credit scores are derived from reports kept by major credit agencies, including Experian, Equifax and TransUnion. These agencies track the amount of debt consumers have taken on and whether they pay their bills on time.

The higher a consumer's score, the more likely he or she will qualify for a good interest rate on credit cards and mortgages. And these scores are increasingly being used for other purposes, such as evaluating potential tenants, setting deposits for utilities and determining the rate on auto insurance policies.

The survey found that a majority of Americans don't know credit scores are being used for purposes beyond borrowing. And it found that many don't know how to improve their scores.

Alan Elias, a senior vice president with Providian Financial Corp., a San Francisco-based credit card company, said "the single most important way to protect your score is ensuring that payments arrive on time each month."

Having a low credit score can cost consumers a lot of money.

The report looked at the likely interest rates consumers would be charged for mortgage loans based on different FICO scores, which are developed by the Fair Isaac Corp. of Minneapolis.

A borrower with a FICO score of more than 720 could expected to be charged a 5.72 percent interest rate, with a monthly payment of $872, on a 30-year, fixed-rate mortgage of $150,000. But a borrower with a score below 560 will likely face a 9.29 percent rate with monthly payments of $1,238.

That's a difference of nearly $4,400 a year in mortgage payments.

Brobeck said consumers with scores below 600 are typically charged relatively high loan rates, while those with scores above 700 are generally charged relatively low rates. Those with scores above 760 generally get the best rates.

A three-bureau report is available from www.myfico.com for $38.85. Providian Financial credit card holders can receive a TransUnion-derived credit score for free.

Under a new federal law that goes into effect Dec. 1, consumers applying for mortgages will be able to obtain their score for free from lenders. They also will have free access to their credit reports once a year from the major agencies, but there will be a fee for access to scores. The government hasn't yet set the fee.

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Data: Latest rates in the US

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Home equity type Today +/- Chart
$30K HELOC FICO 3.79%
$30K home equity loan FICO 4.99%
$75K home equity loan FICO 4.69%
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