5 is the max required for Blacksmithing/Crafting, you can boost it further by items however I do not believe this improves the items any further.
The items will improve based on your level more than anything, You will need blacksmithing not crafting to upgrade armor on the Anvil
See my crafting thread for ideas on requirements
http://www.larian.com/forums/ubbthreads.php?ubb=showflat&Number=511616#Post511616
