The folks at FICO explain to consumers with questionable credit that are thinking of applying for a car loan what will and will not work to improve their credit scores
Most car buyers with poor credit probably know that not paying their bills on time – or even at all – can both lower their FICO scores as well as either prevent them from getting an auto loan – either that or cause them to pay a higher interest rate from a subprime lender. But in addition to this, how they use credit can also affect that three digit number.
Here at Auto Credit Express we know this is the case because for more than twenty years we’ve been helping car buyers with bad credit looking for online auto loans find those dealers that can secure an auto loan approvals for them.
In fact, a couple of years ago FICO published an article that discussed a few incorrect assumptions about credit scores. Since we found this information to be helpful, we thought we’d share some excerpts from it:
Myth: To get a high score, run up high balances on your credit cards.
Contrary to what some believe, using a lot of credit is usually NOT good for one’s credit risk score. Roughly 30 percent of a FICO® Score is determined by the person’s reported debt, with particular emphasis on revolving credit utilization (balance divided by credit limit). We find that high scorers typically keep their reported utilization under 25 percent on credit cards.
Myth: Paying your credit card bill down to zero every month will boost your score.
This is a great habit to get into and we strongly encourage it. It helps the consumer firmly control her credit card usage, encourages her to spend within her means, and helps avoid runaway debt. Because the information on credit reports is limited, however, this excellent habit doesn’t necessarily translate into a higher credit score.
Here’s why. The FICO Score can’t see – and can’t deduce — how much the borrower last paid the card issuer. On the credit report you’ll see the account balance last reported by the card issuer. But the previous month’s balance isn’t shown. Nor is the amount of the borrower’s last payment. And the way an account balance is reported, it rarely reflects the borrower’s most recent payment. That’s because many lenders report to the credit bureau the same outstanding balance that was last billed to the borrower. Other lenders report the balance as of a particular day in the month. So if a borrower habitually runs up a high card balance every month, his credit report will likely show those same high balances even though he routinely pays off his balance in full every month.
Myth: To raise your credit score quickly, open a new credit card or take out a loan.
The FICO Score considers a wide variety of information about each reported account. In this case, opening a new account will likely have more negative effects than positive effects on the person’s score. On the plus side, it may improve the person’s credit utilization rate. It may also broaden the mix of credit types on the person’s credit report although this is a minor scoring factor. On the down side, the person will typically lose points in areas such as their length of credit history and the area we describe as “new credit,” or one’s propensity to seek new credit. Although the score will most likely drop from opening a new account, it should recover within a few months in response to responsible credit management. The best advice for consumers is to take on new credit sparingly and only when genuinely needed.
Myth: To raise your credit score quickly, close any unused credit cards.
If opening an account can lower your score, then closing an account must raise it, right? Actually this is rarely the case. Years ago lenders believed that having too much unused or available credit was a high-risk factor. In reality, having unused or available credit is often indicative of lower risk, and is viewed favorably by the FICO Score. Closing a credit card typically removes available credit from the person’s credit report. That’s why closing a credit card doesn’t boost one’s FICO Score, and in some situations may actually cause the person’s score to drop.
The Bottom Line
When ites to repairing less than perfect credit, it’s important for car buyers to have an understanding of how different financial decisions can affect their FICO scores.
One more thing in addition to credit repair that we feel is important to know – especially if you have credit issues or you’ve been turned down for a conventional auto loan: Auto Credit Express matches people that have experienced problems with their auto credit with new car dealers that can offer them their best opportunities for approved auto loans.
So if you’re ready to reestablish your car credit, you can begin now by filling out our online auto loan application.
by Gemma Maddock