In our post-crisis economy, good credit isn’t just nice to have — it’s essential if you want to level the playing field with lenders.

Credit scores are three-digit numbers lenders . . . → Read More: Raise your credit score to 740]]> As lenders continue to tighten credit requirements, getting a good interest rate — or a loan at all — requires that you understand how the scoring system works.

In our post-crisis economy, good credit isn’t just nice to have — it’s essential if you want to level the playing field with lenders.

Credit scores are three-digit numbers lenders use to gauge your creditworthiness, and until the financial crisis hit, a 720 FICO credit score was enough to get the best loan terms. Even people with lower scores could get decent deals, and at the peak of the lending boom it seemed that no score was so low that it merited a rejection.
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These days, lenders typically demand 740 scores for the best mortgage rates. Lower scores mean higher rates or perhaps no loans at all. Fannie Mae, the giant mortgage-buying agency, recently lifted its minimum score requirement from 580 to 620.

People with top scores are still getting credit card and balance transfer offers. If their issuers raise their rates or lower their limits, they can move their business elsewhere. People with weaker scores, by contrast, are finding their access to credit slowly strangled. Issuers can push them around, and credit seekers have little recourse.

* Check mortgage rates near record lows

Less-than-stellar credit can hurt in other ways. After all, credit information is used by:

* Insurance companies to evaluate applicants and set premiums.
* Landlords to decide who gets apartments.
* Employers concerned about higher risk of theft from those with troubled finances.

Clearly, cultivating good credit scores is an essential 21st-century skill.

A lot of lenders have really strict . . . → Read More: How to Boost Your Credit Score]]> Your credit score is quite important whenever you are thinking about purchasing a home or car. This is because this three digit number is what will help to determine just how much of an interest rate you are going to have to pay for the money that you are borrowing.

A lot of lenders have really strict rules whenever it comes to the terms of loans that they process. These rules usually place a lot of emphasis on your credit score. So, you should know that even a difference of only two points can cost you thousands of dollars. This is because, according to the Fair Isaac Corporation, the interest rate difference here is approximately one-third of a percentage point. While this may not seem like a lot, whenever you have a $165,000 30-year fixed mortgage, this is a lot. In fact, it could cost you over $11,172 in interest alone. While these are only averages, it is still important to understand the differences here.

Most lenders practice tiered pricing today. Herein interest rates will rise as credit scores go down. Of course, each lender chooses their “break point” between the tiers. This means that one lender may bump up the interest rate if a score falls beneath 700 but another lender may not charge a higher rate until your credit score falls to 690 or below. Therefore, with some lenders it is important to raise your credit score just a couple of points.

Not only does the aforementioned information highlight the importance of doing everything possible to improve your credit score but it also highlights the fact that it is vital to shop around whenever you are looking for a mortgage. Mortgage lenders don’t see any sharp break points here though. Therefore, a good consumer should do whatever any broker will do and look for a lender that will offer them the best rate for the score that they have.

Before you go mortgage shopping you should take some steps to improve your credit score instead. There are numerous factors that will play into the calculation of your credit score. This makes it impossible to say that one specific action will increase your credit score by a set number of points. However, here are some guidelines to keep in mind:

1. Always pay your bills on time.
2. Keep your account balances low.
3. Only take out new credit whenever you really need to do so.

Craig Watts of Fair Isaac Corporation says that people who follow these three simple rules have really high credit scores. This is because they are being both cautious and conservative with their credit instead of treating it like a play thing.

While this is great advice, these things will take you some time. If you are in need of a few extra points to bump up your credit score quickly, this won’t work for you.