The "Tricky" New World in the World of Credit Scoring

 Do you know your credit score? As important as this number is most of us don't really pay attention to it until we're about to borrow a lot money. 

Well, according to Smart Money magazine, until recently, a credit score of 680 was considered pretty good which basically meant you paid most of your bills on time, "got dinged" slightly when you went shopped for a refi, but had a good enough credit record to get a loan at the best rates. 

Not anymore. These days 680 is second-tier says Smart Money. Now, you need a credit score of 720 to get large loans on the best terms. That includes one of those 0% interest credit cards with the longest promotion or a jumbo mortgage. It adds that 40-point difference between 680 and 720 will cost you thousands of dollars over the life of a typical loan.

According to Smart Money, there's not much wiggle room either, and that lenders place borrowers into brackets. That means someone with a score of 719 is in the same bracket with someone who has a score of 690.

Informa Research Services says that one point could cost more than $600 over the life of an average 36-month car loan, or $2,500 over the life of a 15-year home equity loan.

Too perfect

Here's an interesting tidbit. Lenders actually prefer you to have a score of 720 than a perfect score of 850. Why? Well, if you have a perfect score, they probably don't make much money off of you. Smart Money says that lenders believe someone with a score of 720 is most likely to repay their debts and least likely to default. At the same time, they're more profitable than people with a perfect score of 850, because they're also likely to carry a balance or incur fees - and therefore, to generate profit for the lender.

The change in what was considered a good credit score apparently happened after the market downturn of 2008 and began when Fannie Mae and Freddie Mac settled on the 720 threshold for the best pricing. Because most mortgages are backed by Fannie or Freddie, the major lenders decided to keep the same threshold.

Obviously, reaching a credit score of 720 is harder than 680, especially with more people out of work and unable to pay their bills. In fact, to have a 720 score, according to Smart Money, you would need low balances on credit cards and a 15-year credit history. You may have been late on a couple payments over the last two years but that's it.

Even someone who regularly pays on time could drop from the mid-700s if he applied for several new credit cards recently. Even those who haven't missed a payment but carry balances that are more than 30% of their credit line could be in jeopardy along with those who have a short credit history but pay on time.

According to John Ulzheimer of Credit.com, if you are right on the edge of 720, you need to be careful because a small differences such as one extra credit inquiry - like when a lender looks up your credit score before approving you for a loan, or if a prospective employer pulls your credit report without telling the credit bureaus it's strictly for employment reasons - could put you under. He says the same thing could happen if you suddenly use more of your available credit because of a large purchase, so make sure you pay it off quickly.

As difficult as it sounds to maintain a 720 credit score, there are some folks who have a near perfect score. According to FICO, the company that designed our current credit model, they are out there.

Craig Watts, senior manager for Public Relations for FICO, told MainStreet.com that while most people score in the middle-to-low 700s on their credit scale, less than 1% of the U.S. population or one million people, do, in fact, net a full score of 850.

Watts says they tend to be more conservative and a little older. Ulzheimer says you don't need a perfect score to get the best benefits. He says anyone a score above 760, is able to get the same benefits as those with perfect credit.

A score of 760 isn't easy to achieve either. MainStreet.com says that to reach the top tier you have to master not just the basics — maintaining positive payment history and a low debt to credit ratio, but you must pay attention to the details as well. If you want to be among the elite in credit scores, this is what MainStreet advises you to do:

• Have a long and impressive payment history and a clean record
• Maintain a diverse set of accounts, such as mortgages, car loans, revolving credit lines and credit cards
• Have a "well-aged" credit report with a long and stellar credit history 
• Have a very limited number of credit inquiries on record, so don't be tempted toopen a new store credit card just to get 10% off.

Fred Yager/consumeraffairs.com