Why your credit score is even more important in 2016

By Jeanine Skowronski/Credit.com

You may already know that your credit scores are very important -- primarily because lenders will use a credit score to determine whether or not they'll lend you money via an auto loan, credit card or mortgage, and how much interest they'll charge on what you borrow.

What you may not realize is that this year, those three-digit numbers will be even more important. Why? Well, back in December, the Federal Reserve Board elected to raise the benchmark federal-funds rate for the first time in nearly seven years -- and it's expected to do so again as the year progresses.

The Fed's benchmark federal-funds rate determines how much interest financial institutions pay to borrow from one another -- and when it goes up, so does the prime rate, the lowest rate that lenders will charge their most creditworthy consumers.

As you may have read, the Fed's recent move means that rates will go up on any existing variable-rate financing, like certain credit cards or home equity lines of credit, that may already be in your credit portfolio. But it also means new loans generally could get more expensive, for all consumers, but especially for those with mediocre to bad credit. And particularly lucrative offers -- like 0 percent financing or long-term balance transfer credit cards -- could get harder and harder to come by.

What can I do?

A good credit score generally entitles you to the best offers and/or terms and conditions on loans, so if yours isn't in good shape, it may be time to focus on improvements. (The good news here is that you will have some time to get your credit in order. The Fed's initial announcement involved raising rates to a range between 0.25 percent and 0.5 percent and future increases are expected to be gradual and contingent on improvements in the economy.)

The first step, of course, is to determine how solid your credit is and what factors may be driving it down. You can do so by pulling your credit reports for free each year at AnnualCreditReport.com and viewing your free credit report summary, updated each month, on Credit.com.)

Everyone's credit profile is different, but you can generally improve your score by settling any defaults, paying down high credit card balances, checking for errors and limiting credit inquiries. You can also build good credit in the long-term by paying all bills on time consistently, keeping the amount of debt you owe below at least 30 percent and ideally 10 percent of your available credit and adding a diverse set of accounts (installment accounts like car loans or mortgages and revolving accounts like credit cards) as your wallet and score can handle them.