SALEM, Ore. (CNN/Money) -
Your credit score, or FICO score, is arguably one of the most important pieces of information in your financial life.
Lenders, among others, scrutinize this rating -- which sums up all of the information in your credit reports with three digits ranging from 300 to 850.
Yet, according to a recent survey, nearly half of all Americans don't understand what these scores measure or what factors go into them.
The survey, conducted by Opinion Research Corporation for the Consumer Federation of America (CFA) and Fair Isaac Corporation, found that 49 percent of respondents do not understand that credit scores measure a person's credit risk, while 45 percent think – incorrectly – that a higher income will result in a higher credit score.
"Despite all of the news coverage about credit scores over the past year, many consumers still do not understand important facts about these increasingly influential numbers," said Stephen Brobeck, CFA executive director.
Just how influential is your credit score?
If your credit score is 580, for example, you are likely to pay nearly three percentage points more in mortgage interest than someone with a score of 720. To put it another way, the payments on a $150,000 30-year fixed-rate mortgage would be about $890 if you qualify for the best rate, according to Fair Isaac, the company that created the FICO score. That same loan could cost more than $1,200 a month if your credit is poor.
To that end, you'll want to check your credit scores periodically, correct any errors on your reports and take steps to improve your score over time. The secret to a better credit score: Pay your bills on time and keep your balances low.
To help consumers understand their scores, CFA and Fair Isaac have prepared a free brochure now available online.
In the meantime, make sure you're not falling for any of these common credit score myths.
Myth: You only have one credit score. In truth, you have three credit scores, one from each of the three major credit bureaus. "These scores can vary by as much as 50 points or more," said Ryan Sjoblad, a spokesman for Fair Isaac. This is why it's a good idea to check all three.
Myth: Checking your own credit will lower your score. You can check your own score as many times as you want without impacting your score, said Sjoblad, but make sure you do so via the bureaus or a legitimate score seller like MyFICO.com rather than, say, at a car dealership.
Myth: Your age, income and sex are factored into your score. According to Sjoblad, none of this information has any bearing on your score. Your employment is something that is listed on the credit bureau report, he added, but doesn't affect the score itself.
Myth: A higher salary will boost your score. Paying off your debts will improve your score. Earning more money, winning the lottery or inheriting a fortune, however, will not because, again, your net worth and income are not factored into your score.
Myth: To remove unfavorable info just dispute it. If there is information in your report that is legitimately inaccurate, you should by all means dispute it. Credit agencies are obligated to investigate credit inaccuracies within 30 days or remove disputed information. But don't fall for so-called credit repair companies promising to remove unfavorable (though accurate) information from your credit reports to "instantly" improve your score. These days credit agencies not only investigate disputes quickly, they know a sham when they see it.
Myth: Shopping around for a loan hurts your score. When you apply for a loan or get pre-approved the creditor checks your credit report, which shows up as an inquiry to your credit. While it's true that too many inquiries to your credit will lower your score, you absolutely can shop around for a mortgage, home equity loan or car loan without worrying about damaging your credit, said Sjoblad. "As long as the same kind of inquiries are made within 14 days of each other, they count as one inquiry on your credit score," he said. Take note: This grace period doesn't apply to credit cards.
Myth: Credit card offers are hurting your score. Credit card solicitations, while annoying, don't affect your score. That's assuming you don't respond to the solicitations and use all of the credit that's available to you. There is no magic number for how many credit cards are too many, said Fair Isaac's Cheri St. John. But, if ratio of credit used to credit available is high, that indicates higher risk. "Clearly consumers want to keep balances below the available credit line," she added.
Myth: When you get married your credit scores are merged. "People think once you're married your credit information gets mixed," said Sjoblad. But, your good or bad credit is yours and yours only 'til death do you part. When you open accounts jointly, though, that information will be reflected on each of your credit reports, for better or for worse.
Click here for five tips for cleaning up your credit.