When you look for a loan to buy a used car, the financing company will run your credit score. The better your credit score, the better your loan rates. In this blog post, we discuss 10 common misconceptions people have about improving their credit scores.
1. There’s Just One Way To Raise Your Credit Score
The truth is that you can improve your credit rating in several different ways: paying off debt, taking out new loans or lines of credit, and establishing good payment history with current accounts. Some strategies work better than others, depending on what type of score each lender uses and how much weight they give each factor they use to calculate it, so be sure to find out which options will benefit you most.
2. My Score Will Be Lower If I Use Credit
The amount of available credit you have across your accounts typically has a smaller impact on your overall credit rating than how much you owe. Since the fraction owed is more important to scoring models than the absolute dollar value of what you owe for each account or card type, it can actually help to carry some small monthly balances if you are trying to improve your credit rating.
3. My Score Will Be Lower If I Stop Using Credit Cards/Installment Loans
There is no direct relationship between your ability or desire to continue using a certain type of account and the impact on your overall credit score. Your utilization rate (the amount owed divided by the total available balance) is what’s most important when it comes to scoring models, not whether you use an installment loan or how often you make purchases with a debit card vs. cash. In general, opening new accounts does have some effect on older scores but only impacts newer ones for brief periods after you open them.
4. The More Credit You Have Available, the Better Your Scores Are Likely To Be
This is a myth because there isn’t any hard-and-fast rule about how much available credit you should have to achieve the best possible score. What matters most for scoring models is whether your payments are being made on time and, if so, by what percentage they fall short of the full amounts owed. Having lots of open installment loans can help improve some scores, but typically only for brief periods after the accounts are opened.
5. A Credit Score of 650 or More Is Considered Good
While it’s true that lenders will generally not use FICO Scores below this threshold to make lending decisions, there isn’t any hard and fast rule about what a “good” credit rating actually looks like because different scoring models have their own criteria which may favor specific types of information over others.
For example, some newer credit ratings such as VantageScore assign greater weight to payment history, age, and the type of credit, whereas older versions of the Fair Isaac model tend to give more emphasis to recent collection actions. As you can see from these examples, understanding how your individual score was created will help you understand why certain factors matter most when it comes to achieving top ratings.
6. It’s Easy to Raise My Score by 50 Points Quickly
Unfortunately, while some quick and temporary fixes can result in a minor bump of about 25 points or so to your score, it’s generally not possible to raise them by 50 points quickly. A good credit rating takes time because the information being used comes from several years’ worth of activity on all types of accounts, including loans, lines of credit, mortgages, and car loans.
Additionally, older scoring models tend to be more heavily influenced by long-term trends compared with newer ones, which give greater weight towards more recent data. This is why it usually takes longer for individuals who haven’t had access to credit in many years to get back into excellent rating territory than it does for those who have had accounts open for short periods of time.
A federal law called the Fair Credit Reporting Act requires that most negative information must be removed from credit reports after seven years. One notable exception is bankruptcy, which can affect your credit for as many as 10 years.
7. I Don’t Need to Check My Credit Score if I Live In a Small Town/Have Never Lived on My Own Before
It’s actually very important that you check your credit score regardless of where you live or how long you’ve been living independently. Although lenders may not lend money to people with scores below 650, they often make lending decisions based on information from models like VantageScore, which consider far more than just payment history when determining grades. Vantage takes on-time payments, low credit balances, new credit obligations, and bank account balances into account when calculating the final score.
Additionally, the only way to know what banks will think of your credit is to check out your scores. Just remember that there are many different types, such as those developed by FICO, Experian, TransUnion, etc., each of which uses a different set of criteria to calculate its results.
8. I Can’t Get Approved for Credit Cards Because I Don’t Have a Good Enough Score
It may indeed be difficult or impossible for lower-scoring people to receive instant approvals since lenders tend to avoid those with the lowest ratings, but most will instead work out payment plans and offer extensions before turning down requests altogether.
In fact, there are even some issuers who specifically target multiple risk tiers by offering several lines of credit, including secured ones designed exclusively for those with bad histories as well as co-branded products aimed at higher-risk borrowers such as branded gas/grocery store cards, etc. In many cases, it is possible to find something suitable if you’re willing to spend some time searching.
9. There’s Only One Type of Credit Score That Lenders Use to Make Decisions
In reality, there are multiple scoring models out there which may vary from lender to lender and even within the same company, depending on what types of accounts a person has and how long they’ve been open. So, it’s important not to assume anything about your credit rating since you don’t have access to the data used by financial institutions when determining eligibility for loans unless you actually check them yourself.
That being said, all FICO scores follow roughly the same criteria, but VantageScore is another popular format whose components can be different than those used in other types such as Trans Risk Score.
10. I Can’t Get a Car Loan If I Don’t Have Good Credit
This is not true. The only factor that will make it harder to obtain financing for large purchases like automobiles and mobile homes is having a bad credit score. However, some lenders specifically target those with poor histories by offering them lower rates than what others might require for similar loans to increase their own market share. In lieu of a credit history, you will need to prove you have a steady source of income that allows you to make car payments in full and on time.
While car dealers may still require larger down payments or charge higher interest rates overall compared with banks/credit unions that offer prime terms, you’ll find many more options available at your local dealership.
Even though it can be difficult to obtain financing for large purchases like vehicles if you have a low score, there are still options out there for all types of credit. Always check your own reports and credit scores before making any decisions about loans or other forms of credit. The only way to find out the truth about your credit score is by reviewing your own history.
