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What Impacts FICO Scores

FICO explains how even consumers with less than perfect credit can raise their credit scores as well as some of the myths surrounding what will and will not help them
What Impacts FICO Scores
Before you buy

Consumers with credit problems probably know that not paying their bills on time or at all can lower their credit scores but in addition to this how credit is used can also affect that all-important three digit number.

At Auto Credit Express we know this is true because we’ve spent over two decades helping car buyers with low credit scores find the right new car dealers that can arrange for approved auto loans. Our website is even set up so that people shopping for a car can research everything from high risk car loans to today’s topic of how FICO explains the impact of certain credit habits.

FICO credit scoring myths

FICO recently released an article that discusses a few incorrect ideas about credit scores. We thought it might be helpful, so here are 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.

As we see it

When it comes to credit repair, it’s important that consumers with poor credit have an understanding of how different financial decisions can affect their FICO scores.

One more thing that we think is important: if you or someone you know has been turned down for a conventional auto loan, we want you to know that Auto Credit Express matches consumers with poor credit with those car dealers that can give them their best opportunities for auto loan approvals.

So when you’re ready to reestablish your car credit, you can begin the process by filling out our online car loans application.

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