By Joanne S. Liu
A recent survey conducted by credit.com educational services, based in San Francisco, Calif., revealed that 96 percent of respondents were unaware of their credit scores. Another 86 percent failed to request their credit reports last year, despite having the legal right to a free report once a year under the 2003 Fair Credit Reporting Act.

The respondents' failure to look into their own financial standing, as demonstrated in this survey, belies the significance of a credit score-- a measure of creditworthiness based on information taken from a credit report--in a person's financial fitness, especially as it relates to obtaining a mortgage loan approval. Yet an individual's credit score may play the most influential role in shaping one's financial health.

A 2005 survey conducted by Consumer Federation of America and Fair Isaac Corporation, the company thatcreated FICO, the most widely used credit score in the world, showed that 49 percent of respondents didn't understand credit scores. Do you understand what factors positively and negatively impact a credit score?

Traditionally, underwriters expend considerable time and effort toward studying and interpreting credit reports. Yet these days, more and more lenders rely largely on credit scores--mechanically derived calculations--when making lending decisions. Relying on a credit score has its advantages: It speeds up the process of loan decision-making and eliminates personal bias and subjectivity in the process.

The country's three main credit bureaus--Experian, Equifax and TransUnion--base their scores on FICO. The higher the score, which can be anywhere from 350 to 850, the more likely the borrower will repay the debt on time. Lenders consider 740 as the lowest score that qualifies an individual for the lowest available mortgage rate. This score, of course, varies among lenders and depends on the specific characteristics of the transaction.

Of the five main factors that determine a FICO score, two of them--payment history and amounts owed--account for nearly two-thirds of the score. As one might expect, payment history is the biggest factor, although not as crucial as one might think. "Payment history is shockingly only 35 percent of the credit score, It isn't even 50 percent. You can have twenty years of perfect payment history and still receive a C rating. Capacity counts for 30 percent of your score. Credit scoring is not offended by the number of credit cards you have. Yet lenders have always been annoyed with too many credit cards." This misinformation that too many credit cards negatively impacts a credit score continues to prevail. Christensen (CU Lending Advice, LLC) says, "It's a good thing to have high credit limits. It's good to have that cushion, so closing credit card accounts can hurt a score."

Some sources recommend keeping capacity no higher than 30 percent of your available credit limit. Misinformation that negatively impacts capacity includes the recommendation to close accounts as a way to boost your score. The opposite happens: closing accounts reduces an individual's overall credit-card lending limit and, thus, increases the percentage an individual has borrowed on the available limit.

What about the differences in scores among various credit bureaus? "Your credit score from the three main bureaus might vary from 1 to 50 points.