Surprising Facts About Your Credit Score

Since your credit score is the gateway to better financial deals, it is important to understand what it is all about. Most people know the basics, such as the fact that making your payments on time will give you a good score, and that it is better to have a small debt to credit ratio. Still, there are some misconceptions about the FICO score that can hold people back and affect your credit status.

For years, car dealerships used the FICO score to decide whether their customers would qualify for an auto loan. This allowed car dealers to know what the lowest credit score can be for you to qualify for the amount you needed to borrow. Now dealers have what is known as a FICO automotive enhanced credit score that they can use. Many lenders have realized that the standard FICO scores do not give the right information for all credit situations. There are several reasons for this, and once you know about these little things, you may have an easier time building your credit score higher or getting a car loan.

Types of Credit Report Inquiries

An “inquiry” occurs when someone takes a look at your credit history. You may have heard that this can harm your score, but this is only partially correct. For example, there are two types of inquiries – “hard pulls” and “soft pulls.” According to myFICO, “soft inquiries” are those times when you check your report or when a company looks into your account to make you a special offer. Also, when a company you already do business with looks into your report. “Hard inquiries” occur when a corporation is checking your report because you have applied for credit.

Soft inquiries do not have any bearing on your credit score. After all, sometimes, they are out of your control. “Hard pulls,” though, can negatively affect your score, but it is not as bad as it sounds. For example, myFICO states that some “hard inquiries” wouldn’t change a person’s credit score at all while others may cause a five-point change, on average. If you are shopping for rates due to a big purchase, such as a mortgage or car loan, those inquiries will all count as a single inquiry as long as they occur within a 45 day period. The only time inquiries might have a significant effect on your credit score is if you were applying for several different credit accounts within a short interval. ¹

Your Score Is Constantly Changing

Many people think of their credit score as being reasonably constant, with changes only occurring after big mistakes or many months of better behavior. The truth, though, is that your credit report can vary from day-to-day, and the auto lender can even receive a score different than the one you see. Your standard credit report is always going to be a snapshot of your financial situation on any given day. It is normal for there to be slight fluctuations from day-to-day.

However, if you are starting to shop around for a big loan, you may want to be smart about how you are using the credit currently available to you. According to Wells Fargo, your current debt to credit ratio accounts for 30 percent of your credit score. ²

The lower this ratio is, the better your score will be. If you are the type of person who uses credit cards to make purchases with rewards, then pays off the balance in full, you could get caught at a bad time. For example, if your credit limit is $2,000, and you decide to purchase an airfare and hotel package for $1,500, you would be using 75 percent of your available credit. This will not normally be a problem if you are going to pay it off. However, a creditor checking your report at that exact time would see that high debt to credit ratio, and possibly a lower score. Thus, it is smart to avoid these types of large purchases when you are shopping around for rates.

What is an Auto Industry Option Credit Score?

Credit bureaus are now offering to lenders and car dealers a copy of your FICO auto score. This is different from your regular FICO score because it focuses on your history in handling any auto loans you may have had. It is a complete report showing all your auto loans, loan payoff value, terms, delinquent payments, and payments sent to collections. There are many other factors listed in the report that are not listed here as well as your regular credit status. It,s purpose is to help the lenders better assess your ability to pay back an auto loan based on experience, and it will have a different score than the typical credit report. If you need a car loan and you have had credit issues with an auto loan in the past you should find out more information about your auto industry option credit score.

You Do Not Have to Carry A Balance

First-time car buyers struggle with credit scores that are too low, and they are unlikely to get any good deals on an auto loan. To build up your credit score, your credit report needs to show activity. If you have credit cards that you do not use, you are not doing your credit any good. What will improve your credit scores, is using your credit cards and showing that you make at least minimum payments on time. If you have not used or applied for credit, you will not have a credit score because no history will be reported to the credit bureaus. Car loans without credit check policies will not help you rebuild your credit because the lender does not report the credit transaction. However, subprime auto loans are designed to help people with weak credit build a badly needed credit history or earn back a better credit score.

With credit cards; however, this does not mean that you have to carry a balance from month to month. Instead, Bank of America recommends using your cards for small, regular purchases like groceries, then paying the balance off in full each month. ³ This way, you will not incur any interest charges. If you have a credit card that offers a kind of reward, you then get to reap the benefits without paying a price.

When you’ve got bad credit, it is easy to get into a slump and feel like you are never going to be able to get out. After all, when you look at your credit report, you can see all of the times that you’ve missed payments over the past few years. The good news is that as time goes on, those late payments start to drop off of your report. There may be mistakes on your report that you should resolve. Call the bureaus and have them remove incorrect items on the report. According to Equifax, one of the credit bureaus that calculates FICO scores, most negative marks on your credit report will disappear after seven years. These include late payments, accounts that went into credit collections, and paid tax liens. Bankruptcies can stay on your report for ten years, and unpaid tax liens usually stay on your report indefinitely. ⁴

Seven or 10 years can seem like a long time, but it is still worth it to try to improve your credit score. Once the debt is paid, the weight of the bad credit mark is reduced until the seventh year when the mark is dropped all together. For example, payments made on time two years after the bad mark was added to your credit score will not carry as much weight as when you first received the bad credit mark.

Many people make their financial mistakes in their 20s. If they start to turn things around, all of the negative information might be gone by the time they are ready to purchase a home in their 30s. Even if you were not able to get the best rate when you got your mortgage or auto loan, focusing on building up your credit can mean that you can refinance for lower rates once your score improves.

If you struggle with bad credit, remember that there are lenders who specialize in loans for people trying to rebuild their credit. These lenders are not as concerned with low credit scores and base your loan on your ability to pay the loan back. In return, you will be building good credit history and improve your credit score.

Final Thoughts

Your credit score acts as a report card for companies who might offer you credit, and it is wise to learn the tricks that can help you get the best score possible. Almost everyone will need to borrow money for a big purchase at some point, and the credit score of the buyer plays a big part in dictating the terms of the loan. We offer a variety of services, good and bad credit auto loans for applicants with discharged or current bankruptcy, poor credit scores, or other financial issues. Being financially responsible is the thing that’s going to set you apart from the crowd and help you to get the best deals. Valley Auto Loans can start you on the way to better credit scores.