Ever since subprime mortgages became more sub than prime, lenders have been tightening up. The days of the nothing-down, no-doc mortgage are gone. Returning to reality, homebuyers need a down payment and proof of income to get a mortgage.

Borrowers must also prove they're creditworthy; they need an acceptable credit score. The higher their score, the more likely applicants will get a loan and the lower the interest rate they'll pay.

For example, Fair Isaac Corp., the Minneapolis-based creator of FICO credit scores, says that an Ohio resident with a 630 credit score would now pay $1,814 a month for a 30-year, $300,000 fixed mortgage. If that Ohioan can boost his score to 640 before applying, he'd lower his monthly payment to $1,711. And if he had a FICO score of 723, the national median, he'd pay only $1,561 a month for the loan. (FICO scores top out at 850, but any score over 760 probably will get the lowest interest rate.)

Boosting a credit score by 90 points might save a borrower about $250 a month, or $3,000 a year. That's like adding one percentage point of total return to a $300,000 portfolio. Landlords, employers and insurance companies also may evaluate credit scores.

Since credit scores can have such an impact, some planners work with clients to maintain and upgrade those scores. "I work with many of my clients on their credit scores," says Jennifer Cray, a partner with Investor's Capital Management in Menlo Park, Calif. "I consider their credit score to be a financial asset. Credit scores matter more than ever."

DECIPHERING SCORES

Despite their importance, little is known about the inner workings of credit scores. Dan Moisand, principal of Spraker, Fitzgerald, Tamayo & Moisand, a financial planning firm in Melbourne, Fla., bemoans "the lack of transparency and clarity about how the score is calculated. A consumer can't see the calculation."

Consumers have three consumer FICO scores, one from each credit bureau (Equifax, Experian and TransUnion). "Various lenders use their own scores, and there are new formulas too. It's confusing," Cray says.

According to Fair Isaac, five components go into its credit scores: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and types of credit (10%).

Punctuality and prudence. Not surprisingly, clients who pay their debts on time tend to have high credit scores. Surprisingly, not everyone appreciates this.

"The fastest way to blow your credit is with a late payment," says Lauren Lindsay, director of financial planning at Personal Financial Advisors in Covington, La. "Even one day late makes a ding in your score." On the other hand, Lindsay says that six months of on-time payments will help to rebuild a credit score.

A consumer who makes one late payment should follow up with the lender or credit card company and explain why the payment was late. "Most of the time, the company will remove the late payment from the record if you call to dispute or explain, especially if you are a good customer," Lindsay says.

A client's payment history and the amount owed are the most important components in a credit score, accounting for 65% of the total. While paying on time is straightforward, it's not clear how high a percentage of available credit is permitted before scores start to drop.

"Consistently paying more than the minimum on all your cards will improve your score," says Bedda D'Angelo, president of Fiduciary Solutions, a financial planning firm in Durham, N.C. "Try to keep the ratio of outstanding debt to available credit under 40%."

This ratio may influence payment strategies. "If your balances are close to the limits, paying them down will raise your credit score," Cray says. "But if you're using less than 10% of your available credit limits, paying down your balance will make no difference."

A large amount owed will lower a credit score, even if the payment is not late. If Jane Smith charges $5,000 on her American Express card, expecting to pay down the balance before the due date, that $5,000 counts as an amount that's owed (and negatively affects her score) until the payment is received.

The old and the new. Length of credit history and new credit account for only 25% of a consumer's credit score, but they are the source of much confusion. "Having accounts with long histories is generally a plus, so consumers are urged to leave older accounts open even if they are rarely used," Moisand says. "Yet if you don't close accounts, you can get dinged for having too many accounts or too much credit available."

Cray says that the credit history of a FICO score goes back 99 months. "Some people think the more cards you have, the worse your score, so you should have just one or even none. In fact, closing accounts can hurt your score." Cray advises some clients to use an old card once a year to keep it alive. "I also warn clients not to open new accounts."