U.S. consumers have a poor understanding of how the credit-scoring system works in obtaining credit cards, mortgages and insurance, costing individuals as much as $28 billion each year, according to a survey commissioned by the Consumer Federation of America (CFA) and Washington Mutual Inc. (WaMu).

The survey estimates U.S. consumers could save $105 annually in lower credit card finance charges by raising their credit score, or FICO score, by 30 points. A low credit score means individuals are spending more money to borrow. The survey showed improvement from previous years, with 28% correctly identifying 700 as the minimum score to qualify for a prime mortgage rate, up from 24% last year.

The survey indicated less than one-third of Americans (31%) understand that credit scores indicate risk of not repaying a loan, rather than factors like knowledge of, or attitude toward, consumer credit. "Lack of consumer knowledge about credit scores not only increases the costs of their credit and insurance, but also reduces the availability of these and other services," says CFA Executive Director Stephen Brobeck.

Respondents did not understand that credit scores are based on payment histories and how they have used credit in the past. Many incorrectly said factors such as income (74%), age (40%), marital status (38%) and education levels (29%) influence credit scores, according to the CFA. Consumers are assigned credit scores on a scale of 300 to 850, with 700 or above considered prime. Below 600 is considered subprime, with greater lending risk.

The importance of FICO scores has increased amid the subprime-mortgage meltdown and the credit crunch. With less money available to lend, many companies have tightened standards, cutting off loans for people with lower numbers, says Peter DeForest, managing partner at Portfolio Defense Consulting Group, a credit risk management consulting company that builds predictive models. Consumers can raise their scores in many ways, including: always paying their bills on time; not maxing out their credit cards or other revolving accounts; paying off debt instead of moving it around; not opening too many accounts in a short timeframe; and regularly checking their credit report, according to Anthony Vuoto, president of Washington Mutual Card Services.

CFA and WaMu has commissioned Opinion Research Corp. to conduct the credit score survey three times since August 2005, polling 1,000 individuals each time.

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