When you come to The KEY to find a used car, one of the first things we do is take a look at your credit. But unlike other used car dealers in Oklahoma City, we’re not trying to penalize you for mistakes you made in the past. Instead, we offer free credit counseling to help you get back on track.
Having bad credit can impact your life in a number of ways, from making it harder to get a home or auto loan to increasing your interest rates and payments on credit cards. But by learning the basics of managing and repairing your credit, you can give yourself a leg up and begin to improve your financial situation.
Part 1: How Credit Works
To repair your credit score and get your financial footing back, it helps to understand how the credit system works in the first place. There are a vast number of things that affect your credit, but fortunately they all boil down to a few basic categories:
- Payment History
- Amounts Owed
- Length of Credit History
- New Accounts and Credit Requests
- Credit Mix (i.e. having different types of credit)
To give you a credit score, lenders and credit bureaus rank you compared to millions of other credit holders in these five categories, and then combine the rankings to form your FICO score. The FICO score is the number most people refer to as a credit score, and it reflects your credit history and how risky it would be for a lender to loan to you.
In general, credit scores range from 300 up to 850, with 300 being the worst score and 850 being nearly perfect credit. Most people score in the 600 to 800 range – a score of 680 is considered an “average” FICO score. If your score is above this number, you’re in pretty good shape. If you’re below this mark, though, you could have more trouble getting loans or credit.
But, your FICO score is not your only credit score. The three major credit reporting bureaus, Experian, Equifax, and TransUnion, each use the FICO score as the basis for their credit reporting, but it doesn’t form the whole picture. Each agency uses their own proprietary formula to calculate a score, meaning a score from each agency will be slightly different. For instance, Equifax scores range from 280 to 850, whereas TransUnion scores range from 501 up to 990. However, every score has a basis in your FICO score, which makes managing your credit easier.
You should also be aware that not every part of your credit is equal. FICO and the credit bureaus consider some areas with more weight than others, so if you’re trying to repair your credit you should focus on the things that they consider to be the most important.
Credit Score Breakdown
As you can see in the above chart, the areas of most concern to credit agencies and lenders are the amount of money you already owe and how consistent you are at paying on time. These two categories make up about two-thirds of your score alone.
However, the other categories are important as well. The length of your credit history, the number of new accounts and requests for credit, and the mix of different credit types all have a significant impact on your overall score.
The elements contributing to these categories may surprise you. Some things, like owing money on credit cards or having a mortgage, are obvious contributions to your credit score and history. However, many people don’t know the full extent to which the credit bureaus monitor their finances. Contributors to your credit score include:
- Unpaid parking tickets and medical bills.
- The percentage of your available credit you’re using – If you’re close to “maxing out” a credit card, even if you make your payments on time, your credit score can go down.
- Using a large amount of credit in a short time.
- Making frequent requests to credit reporting agencies.
- The length of time and amount owed on any missed payments.
Equally surprising to many are the things that aren’t included in your credit score or credit report:
- Your age, sex, race, or any other personally identifiable information.
- Your salary – a lender may ask how much you make in order to justify approving or declining a loan, but it is not part of your credit score.
- Interest rates on cards or other accounts or loans.
- Personal, promotional, or employer-authorized credit checks or requests.
Understanding which financial decisions impact your credit and which ones don’t is an important part of learning how to manage your credit more effectively.
Understanding how your credit score is built is only half of the equation, though. To improve your credit, you need to know about the different ways you can raise your score.
Part 2: Improving Your Credit Score
Repairing your credit can be a long process. If you have a low score, simply following one or two of the steps below will not improve your score much by themselves overnight. But in the end it will improve your financial situation dramatically.
The first, and most important, step to help your credit score is to get a copy of your credit report and examine it for any errors. Every person is eligible to request a free copy of their credit report from each major bureau. The easiest way is to go to www.annualcreditreport.com. Things to look for include incorrect amounts owed on your open credit, outstanding payments that you’ve already paid, or items that look fraudulent. If you do see something you believe to be an error, contact the agency and file a dispute.
Because the credit agencies evaluate your credit-worthiness in terms of different categories, it’s best to look at how to repair your score in each one.
Payment History
The largest part of your credit score, your payment history, is also one of the most straightforward to improve. By making at least the minimum payment on all of your accounts every month, and paying bills and other financial obligations on time, you will see your credit score begin to rise.
If you are behind on payments, it’s vital that you get up to date on your obligations. Also, if you’re having trouble getting caught up, you can always contact your lender or visit a credit counseling service (like the one we provide at The KEY) to give you some advice. Visiting a counselor doesn’t hurt your credit, either, so don’t worry about asking for help.
Amounts Owed
The next significant factor in upping your credit score is reducing the amount you owe. This requires a certain amount of discipline, but in the end you’ll find yourself with less debt and more trust from creditors.
Begin by making payments as big as your budget will allow. Paying more than the minimum rarely carries a penalty, and it also shows creditors you mean to get your finances in order. However, don’t close out accounts or move debt around as a short-term strategy, as these actions can actually hurt your credit by lowering your credit mix.
Once you’ve paid down some of your debt, do your best to keep your balance low. That doesn’t mean you shouldn’t use your credit cards, but when you do use them make sure you can pay the balance off in a timely manner.
Length of Credit History
Though there isn’t much you can do to increase the amount of time you’ve been managing your credit, you can help your score by not opening too many accounts at one time. Applying for a number of new credit cards, loans, or other credits may negatively affect your score, as it shows lenders you’re taking on new debt without any change in your payments.
The best strategy, especially for new credit users, is to slowly build your credit and make use of it – by making at least the minimum payments and showing you can handle your finances responsibly.
New Accounts and Requests
If you do need to open an account or get a loan, make sure you make your requests within a short timeframe. Spacing out requests for credit over days or weeks can have a short-term negative effect that can impact the amount of credit you’ll receive or your interest rate.
Once you open a new account, make sure you stay current on your payments and handle them responsibly.
Credit Mix
Having a mix of different credit – credit cards, loans, and bills – can help your credit score, especially if you pay all of them in a timely manner. Having a diverse, established credit profile shows lenders you’re responsible and can manage a variety of debts at once.
However, this doesn’t mean you should open new lines of credit simply to diversify your profile. This dovetails with the length of credit history and new account advice – it’s better to have a well-managed but small credit profile than a larger one with very little history.
Overall, your credit score can have a significant impact on your life, but that doesn’t mean you can’t improve it. In the meantime, if you have bad or no credit and need a vehicle, you can always come to The KEY. We’re Oklahoma City’s number one buy here, pay here car dealer and we can work with you to find a car and a payment schedule that fits your finances. And we also offer free credit counseling to all of our customers. Visit our lot today, or follow us on Facebook to get the latest updates and news.
Take a look at all of The KEY’s inventory online, or visit our car lot to view our cars in person. You can also call one of our friendly salespeople with any questions, or follow us on Facebook and Twitter to get the latest updates on our buy here, pay here car dealership in Oklahoma City.
