A new national research study found that American consumers have a "poor" grasp of the mechanics and importance of credit scores -- a lack of knowledge that can cost them thousands of dollars needlessly when it comes to obtaining a home mortgage.

The study, conducted by pollster Opinion Research Corp. and sponsored by Washington Mutual and the Consumer Federation of America, surveyed a nationally representative sample of more than 1,000 consumers.

Misunderstandings about credit scores were rampant:

• Less than a third (29%) of respondents were aware of the meaning or uses of credit scores -- that they predict the risk of nonpayment of loans.

• Less than half (47%) knew that Experian, Equifax and Trans Union are national credit bureaus.

• Less than a quarter (24%) knew that the lowest FICO score needed to qualify for a low-cost mortgage generally is around 700.

• Only 45 percent of consumers polled were aware that they have more than one score-one each from the three credit bureaus. Scores on the same individual from the bureaus differ at least slightly because each bureau has different information on file.

• A stunning three quarters (74%) of respondents said they believe that their income level influences their credit score -- despite the fact that the credit bureaus have no access to data on personal income, and do not maintain records on income. One third said they believed their scores were tied, at least in part, to their educational attainments.

• Thirty-four percent of African-Americans said they believe that credit scores are affected by race or ethnicity, contrary to federal civil rights laws.

"Overall," said Stephen Brobeck, executive director of the Consumer Federation of America, "the results (of the study) were sobering." Consumers' "understanding is poor and has not improved over the past two years." CFA co-sponsored a similar survey by Opinion Research Corp. in 2005. The current study, conducted during the month of May, has a statistical margin of error of plus or minus three percent.

Americans' lack of correct information about scores and the credit system is costly, according to the survey. If all consumers raised their FICO scores by just 30 points on average, "total consumer savings would exceed $20 billion" a year.

The potential impact on home buyers is especially severe. Using data compiled by Fair Isaac Co. from regular surveys of mortgage lenders, if an applicant seeking a $300,000 fixed rate mortgage raised his or her credit score from 580-619 to 660-699, the applicant would save $5,148 in annual interest payments.

Raising the score from 620-639 on a 15-year home equity loan of $50,000 would cut annual interest costs by $1,044.

The same pattern of savings exist in other areas of consumer finance as well, noted Brobeck. For example, raising one's score from 590-619 to 660-689 would cut interest payments on a 36-month $25,000 auto loan by $708 a year. Significant savings can also be achieved by raising scores in advance of applying for insurance or even cellphone service.

But "mortgage finance is where the biggest savings are possible when a consumer understands credit scores" and knows what factors raise them and lower them, said Brobeck in an interview. CFA and WaMu said they recommend that consumers-and the professionals who advise them-redouble their efforts in the field of credit literacy. Vast educational resources to help in that endeavor exist on the Web, and a good starting place for understanding scores is Fair Isaac's site, www.myfico.com.

Published: July 30, 2007

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consumer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.