Credit scores are critically important. They determine your ability to obtain credit and how much you will pay for it. 

A bad score could prevent you from getting a credit card or renting an apartment. It can increase the cost of services, such as cell phone, electric and cable.

And yet, a lot of people don’t know much about credit scores.

A new survey done by the Consumer Federation of America and VantageScore Solutions finds that:

• Two-fifths do not know credit card issuers and mortgage lenders use credit scores to decide about granting credit and pricing.
  Two-fifths incorrectly believe personal characteristics such as age and marital status are used in calculating credit scores.
•  Between one-quarter and one-third do not know when lenders are required to inform them of the credit score used in their lending decision – after they apply for a mortgage, when they are turned down for a loan and when they don’t receive the best price or terms.
•  More than one quarter do not know the key ways to raise or maintain their scores – keeping credit card balances low and not applying for several cards at the same time.
•  More than one-third incorrectly believe credit repair agencies are always or usually helpful in correcting credit report errors and improving scores. They are not.

How can you raise your credit score?
To improve your credit score, do things that show lenders you are trustworthy and a low risk. That includes:

• Pay your bills on time every month.
• Keep a low balance on your credit and charge cards.
• Pay down debt rather than just move it around.
•  Don’t open new credit accounts rapidly.

You should check each of your three credit reports for errors at least once a year. It’s free. Go to www.annualcreditreport.com.

To help you learn more about credit scores, the Consumer Federation of America and VantageScore Solutions have updated their interactive  quiz Credit Score Quiz (English) or Credit Score Quiz (Spanish).

During a TODAY Money web chat on Wednesday, John Ulzheimer, president of consumer information at SmartCredit.com explained the ins and outs of credit reports and answered readers questions. You can read the full chat:

In the fall of 2011, I went on an episode of “The Suze Orman Show” to ask her how to repair my credit, and I knew I was in big trouble when she told me there was nothing she could do.

My mistake was co-signing a mortgage for a friend, who ended up not making her payments.

It was just before the housing market crashed in 2008, when a close friend decided to make the leap from renting to homeownership. Like myself, she was a single mom. We had known each other since grade school, participated in the same Brownie troop. We talked on the phone daily and had more than 20 years of friendship between us.

LearnVest

Sibylla Nash is a freelance writer and novelist.

When, in the eleventh hour, the bank told her she needed a co-signer in order to close on the property, I said I would do it. I don’t even remember if she asked or if I just volunteered. It was a knee-jerk reaction to help a friend. I didn’t want to see her lose the opportunity.

That was my first mistake.

I didn't realize how bad it was
I was self-employed as a freelance writer. I knew the repercussions of co-signing … sort of. But I didn’t fully investigate exactly what would happen if she missed a payment because I assumed it wouldn’t be an issue. When I originally signed, I told her I didn’t want to be on the loan for more than a year. The plan was that she would refinance her home after a year of payments and get a new loan without me on it.

I knew how hard she worked to get to this point and felt that she would value her credit just as much as I valued mine.

I had to find out the hard way that co-signing on her condo increased my debt-to-income ratio (how much I owe versus how much I earn), which is not a good thing when you’re trying to buy a house or make any major purchases. At the time, I was trying to sell my house in New Jersey to move to Los Angeles. Mistake No. 2.

Everything went well for the first year. Unfortunately, the market was beginning to crumble. Before the real estate crash, banks were handing out refi’s like candy, but when my friend bought her home in 2009 they had started tightening their belts. She was unable to refinance me off her loan.

She lied, and I suffered
It wasn’t until the fall of 2009, when I was thinking about getting satellite television, that I checked my credit report and discovered $10,000 in past due payments. My friend had missed not one, not two, but three mortgage payments!

(Looking to learn more about mortgages? Check out the loans and mortgages section of our Knowledge Center.)

My credit score plummeted from 800+ to the low 600s after she defaulted on her mortgage. Several credit card companies dropped me, while others lowered my credit limit to the balance due.

I was embarrassed and ashamed about the multitude of letters I received from my creditors telling me they were cutting off my line of credit. Basically, I was left with no credit, no access to more credit and a horrible credit score. I was devastated, all because of my own mistakes.

Mistake No. 3: If I had been monitoring my credit (learn how here), I would have known the first time she missed a payment.

Were there extenuating circumstances that somehow explained her behavior? No.

She hadn’t lost her job and didn’t experience any major medical emergencies, so I don’t know how she managed to get so far behind. To this day, I still don’t know what happened -- even while she was missing her payments, we were talking on the phone nearly every day, and it never came up. Whenever we talk about her delinquency, she’s apologetic, but has never tried to justify it.

Her lack of communication and honesty destroyed our friendship. She wasn’t forthcoming when she realized she was in trouble, and going forward she wasn’t honest about her ability to pay. Today, we barely speak unless it has to do with the house (which I’ve never even seen, as I live in Los Angeles while she and her house are in New Jersey). 

I’m on the road to recovery
As it stands, she hasn’t made a mortgage payment in more than a year and owes almost $30,000. We owe this amount. Co-signing makes me just as liable. The house has been under contract for a short sale and hopefully we will close soon (although I found out only three weeks before closing that she neglected to pay another $25,000 in outstanding dues, so who knows what will happen now). Mistake No. 4 was not creating any type of contract that outlined our agreement.

I wouldn’t recommend co-signing on a stick of gum for anyone after going through this. It is more trouble than it’s worth. If the friendship has to end because your friend insists that you co-sign, at least you still have your credit.

All is not lost for me. In order to bring up my credit score, I’ve been focused on paying down my credit card bills and student loans. For the last two years, I’ve used lump sums of my tax return to pay off my credit cards. In effect, I’m decreasing my debt to income ratio and showing that I am able to keep up with my obligations on time.

My credit score has inched up to 698. I’ve paid off two cards in the past two years. I have one more to go, plus my student loans, and then I’m done! That has been the most exhilarating part of this journey. I’m on the road to becoming debt-free (except for my own mortgage).

It’s also forced me to operate more on a cash-only basis because I have limited credit, which has the side benefit of helping me budget better and be smarter with how I spend my money. I don’t have the credit resources I used to have in case of emergencies.

It’s also prompted me to have honest conversations about credit and our responsibility with my daughter. It’s not that my parents never cautioned me about co-signing for someone, it’s just that I never thought the worst case scenario could happen to me.

(When talking to your children about money, keep from making these mistakes.)

I’ve learned the lesson that you never want to put your financial livelihood in someone else’s hands. And when you co-sign, that’s exactly what you do.

Sibylla Nash is a freelance writer and author of novels “Bumped,” “DreamCity” and more.

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Paul Sakuma / AP

A bad score could cost you a loan. That's why it's so important for you to understand how credit scoring works.

Your credit score, which is based on your credit history, can have an enormous effect – positive or negative – on your life. A good score could save you thousands of dollars a year in interest. A bad score could cost you a loan. That’s why it’s so important for you to understand how credit scoring works. 

A new surveyby the Consumer Federation of America (CFA) and VantageScore Solutions shows overall knowledge about credit scores has improved significantly in the past year. But the results also make it clear there’s still a long way to go.

Many consumers still need to learn about what scores represent, how to get access to them and how to improve them,” notes CFA’s executive director Stephen Brobeck.

Fewer than half (44 percent) of those surveyed are aware that a credit score typically measures risk of not repaying loans, rather than the amount of debt or financial resources you have. Only 29 percent know how costly a low score can be.

“Very few people understand that on a conventional new car loan ($20,000 for 60 months) if they have a low score that will cost them $5,000 more in additional interest charges than a borrower with a high credit score,” Brobeck says.

One of the most troubling findings: more than half the respondents still think, incorrectly, that a person’s age and marital status are used to calculate credit score. One-fifth (21 percent) incorrectly believe ethnic origin is a factor.

“Your ethnicity isn’t even on your credit report, so it’s impossible for it to be a factor in computing your credit score,” explains John Ulzheimer, president of consumer education at SmartCredit.com. “Your credit score is not influenced by anybody but you. Your own actions completely determine the score.” 

One key area of misunderstanding: the impact of multiple credit checks while applying for a loan during a one to two week period. Few people (only 9 percent) know that shopping for a loan like this will not lower their credit score. 

“If people are not shopping for credit because they think it will negatively impact their credit score, that’s not good,” says Adam Levin, chairman of credit.com. “People need to shop around and get the best deal at the best rate. That’s good for the consumer and good for the economy.” 

Despite years of warnings about credit repair companies, more than half the people contacted (51 percent) believe that these companies are “always” or “usually” helpful in correcting credit report errors and improving scores. That’s troubling. 

“Experts around the country are in almost complete agreement that these credit repair companies overpromise, charge high prices and also perform services that consumers could do for themselves,” CFA’s Brobeck warns. 

The Consumer Federation of America says there are ways to raise your credit score. 

• Consistently pay your bills on time every month.
• Don’t max out, or even come close to maxing out, your credit cards or other revolving credit accounts.
• Pay down debt. Don’t just move it around.
• Don’t open a lot of new accounts rapidly.
• Check your credit reports from each of the three big credit reporting agencies throughout the year to make sure they are error-free. You can get one free copy from each bureau every twelve months. Use this website -- www.annualcreditreport.com -- or call 877-322-8228. You must give your Social Security number since this is how credit reports are tracked.

How much do you know about credit scores and credit reports? Take the CreditScoreQuiz. There is also a Spanish language version.

• More information:
  ConsumerMan: Credit Information that’s really, 100% free 
• Federal Trade Commission: Credit Repair 
• Federal Trade Commission: How to Dispute Credit Report Errors 
• FICO: Credit Basics