In the wake of the economic downturn, banks and credit card companies tightened their lending practices, making a good credit score extremely important. For consumers with bad credit, that means knowing how credit scores work is just as critical.
One idea that many consumers are not aware of is that the percentage of their available credit that they’re using can greatly affect their score. If a buyer is using a $10,000 limit credit card and racks up $9,000 in charges, they’re using 90 percent of their available credit – something that lenders take as a red flag, even if the borrower makes the payment on time. Ideally, borrowers should try to limit their credit usage to 30 percent of the limit.
Even consumers paying down debt can run afoul of this practice. Many credit cards, for example, will automatically lower a limit once a certain amount of charges are racked up, according to MarketWatch. This is known as “walking up the balance.” So even if a borrower pays down $2,000 of their $9,000 charge leaving a balance of $7,000, the company will set a new limit of $7,500 – meaning a customer is still using a high percentage of their credit.
Consumers should keep this in mind, but also know that they may be pre-approved for an auto loan regardless of their bad credit history.