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As I write this in June 2009, you generally need a credit score of at least 660 to get a mortgage. Not too long ago you could get a loan with as little as 580, but banks are more cautious these days because of the mortgage crisis (which was caused by lending to folks with low credit scores who ultimately defaulted on their loans).

Your credit score doesn't just dictate whether you can get a loan, it also impacts how good an interest rate you get. The worse your credit score, the higher the rate of interest. You might also have to have a larger down payment than otherwise. This bears repeating: Bad credit doesn't just mean you might not get the loan in the first place, it means that if you do get the loan, you'll have to pay more interest, and you'll be required to make a larger down payment.

Here's an example from MyFico.com in June 2009 about how credit scores might affect the interest rate -- and therefore the cost of the loan -- on a 30-year, $200,000, fixed-rate mortgage.

Credit Score	Interest Rate	Monthly Payment
760 - 850	5.26%	$1,540
700 - 759	5.48%	$1,567
680 - 699	5.66%	$1,589
660 - 679	5.87%	$1,616
640 - 659	6.30%	$1,670
620 - 639	6.85%	$1,741

Payment based on $200k home, 5% down, PMI, closing costs rolled into mortgage, includes estimated taxes + insurance.
Loans are not generally available to those with credit scores below 660.

Consumer Reports also addresses this topic, saying, "Over the life of [a $150,000] loan, the people with the best credit scores may pay roughly $138,000 less than those with the worst."

The higher your credit score, the less you'll pay for your mortgage. The lower your score, the more you'll pay. It's therefore important that you improve your credit score if it's low.

Average credit scores

The median U.S. score is 723. Here's how the American population's credit scores stack up. Credit Score Percentage of population with this score 800+ 13% 750 - 799 27% 700 - 749 18% 650 - 699 15% 600 - 649 12% 550 - 599 8% 500 - 549 5% less than 500 2% From MyFico.com, Aug. 2006

Credit Report vs. Credit Score

Your credit report and your credit score are two different things. Your credit report is a list of things like your credit card and bank accounts, outstanding loans, and your payment history. Your credit score is a rating of how good your credit is, based on your report. In other words, your credit report is a bunch of pages, and your credit score is a number from 300 to 850.The main things on your credit report that hurt your credit score are:

• Bankruptcy
• Outstanding (unpaid) debts
• Late payments
• Credit card balances near the credit limit on those cards
• Liens (both outstanding and paid)

You increase your credit score by cleaning up your credit report. The score is based on the report, so get a clean report, and you'll have a good score. We'll cover cleaning up your credit report later, but for now let's continue learning about your report and your score.

You actually have three credit reports

The companies that keep track of your credit report are called credit reporting agencies (CRA's) or credit bureaus. There are three of them: Trans Union, Equifax, and Experian. So you actually have three credit reports, since there are three CRA's that track your credit. They're usually very similar (often nearly identical), but sometimes they can differ. For example, most credititors report late payments to all three CRA's, but some might report late payments to only one or two CRA's rather than all three.This means that if you need to clean up your credit report, you probably have to clean up three different credit reports. You never know which CRA your lender is going to consult about your credit (although some lenders will tell you if you ask). Many lenders consult all three CRA's, too.
You can get your own reports yourself because by law each CRA has to give you a copy of your report once a year if you ask for it. You start out at AnnualCreditReport.comwhich in turn sends you to each of the three CRA's websites. But be careful! These sites often make it hard to see how to get your report for free, while they put misleading come-ons for paid services right in front of you (free for the first 30 days after which they bill you every month). Many people sign up for these accidentally, thinking that that's what they need to do in order to get their credit report from the site. You can really get your reports from these sites for free, but you might have to hunt a while for the right options.
Also beware that these sites will generally try to sell you fake credit scores -- scores that are completely different from what your lender actually uses. To protect yourself against that, let's learn more about credit scores.

Kinds of credit scores

The most common kind of credit score is the FICO score, which is calculated by a company called Fair Isaac. Fair Isaac makes its money by selling the FICO scores on individual consumers to banks. When your bank buys a credit report from a CRA like TransUnion, it also buys the FICO score calculated from the TransUnion report.  Since you have three different credit reports, you also have three different FICO scores.  In fact, your bank might order all three scores.While the FICO score is the most common, the three CRA's each have their own scores that they try to sell to the banks.  TransUnion sells a "TransRisk" score and Experian sells a "ScoreX" score.  Banks generally use the FICO score because it's the industry standard, but some banks might go with the CRA brand because it's cheaper.
Many banks have also devised their own system to calculate credit scores from credit reports.  That way they don't have to pay anyone for the credit score.
So there are potentially seven different scores your lender might see:

• The FICO score from the three CRA's
• The proprietary score from the three CRA's
• The lender's own internal score

So why is this important?  Because if you're checking your credit score(s), you need to make sure you're looking at the same one(s) your lender sees!  The best way to find out what scores your lender uses is to ask them -- they'll generally tell you.  If you don't have a lender in mind yet, then get genuine FICO scores, because that's what most banks use.

Getting your credit scores

Paying for them

• You can get your TransUnion- and Equifax-based FICO scores fromMyFico.com for ~$32.
  
• You can get just your Equifax-based FICO score for $16, which is okay only if you know that that's the only score your lender is going to look at.
  
• You can't buy your TransUnion-based FICO score alone from anywhere.  The only way to get your TransUnion-based FICO score is to buy it together with the Equifax-based score from MyFico.com.
  
• You can't get your Experian-based FICO score from anywhere, because Experian doesn't allow consumers to have it, even if they pay.  Only your lender can see it.  (Yeah, Experian has gotten a lot of flak about that.)  You can buy Experian's proprietary score (which is what they want you to do), which will at least give you an idea of how good your Experian credit report is.
  
• Beware of sites offering "Your Credit Score", since 99.9% of the time they're not real FICO scores.  That's true on even the TransUnion and Experian sites, which don't sell FICO scores directly.  The only places to get real FICO scores areMyFico.com (TransUnion + Equifax) or Equifax (Equifax only).
  

Getting them for free

You can ask your lender for your score(s) once they've run your credit.  Getting your credit scores after you've applied for a loan is kind of like putting your seatbelt on after you've already had a wreck, but if you've already applied for a loan, your lender will often tell you your score if you ask.  In fact you should ask for a copy of the whole report(s), so you can get an idea of what the problems are if your score is low.  Most lenders make you pay for the report(s) before they order it, and if that's the case and they won't share it, point out that you paid for it, not them.Of course, if the lender already approved your loan and you got a great interest rate, then your credit score is kind of a moot point.  But if you didn't get the lowest rate possible, then you'll want to shop around at other lenders, and in that case you need to know what's on your credit report to see if you can clean it up to improve your score.  (More on that later.)
Another possible way to get a free FICO score is through your credit card company.  Most cards don't offer this service, but some do.  For example, with my Washington Mutual card, I can login to my account online and see my FICO score based on my TransUnion report.  The problem here is that you can't see the other two FICO scores, and if you're making an investment as big as buying a house, it's best to cover all your bases and get all three.

Do I need to improve my credit score?

That depends on how good your credit is, of course.

Excellent credit. If you know that each of your FICO credit scores is 760 or higher, your credit is excellent and there's no need to try to improve your score.Good credit. If your FICO scores are between 700 and 759, then you have a choice: cleaning up you reports and getting your scores about 760 will get you a slightly higher interest rate, but not much. (See the table above.) So it's up to you whether it's worth your time in trying to improve your credit rating.
Fair to Bad credit. If your FICO scores are less than 700, or if you don't know your scores but you have your credit reports and can see that they list negative items, then it's time to start rebuilding your credit.