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Understanding your FICO Scores

The good folks from FICO spell out how you can improve your credit scores before filling out an application for bad credit auto loans
Understanding your FICO Scores
What we have seen

People with less than perfect credit need to understand how different credit uses can affect those all-important FICO scores.

At Auto Credit Express we know this is important because we’ve spent the last twenty years assisting car buyers with low credit scores. Our website is even set up so that potential buyers can understand everything from tote the note car dealers to today’s subject, how credit habits affect FICO scores.

FICO scoring myths

FICO recently published an article discussing some of the incorrect ideas about credit scores. Here are some excerpts:

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

Especially people with poor credit should be aware of how their financial decisions will affect their credit scores.

One more thing: if you’ve been turned down for a regular car loan that doesn’t mean the only remaining choice is a buy and pay here dealer. Because at Auto Credit Express we place applicants that have poor car credit with dealers that can offer them their best chance at getting auto loan approvals.

So if you’d like us to help you get started, you can begin now by filling out our online auto loans application.

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