You're all set to buy a used car. You know what type of car you want, the color and trim level. No need to check your credit because you pay your bills on time and aren't worried about qualifying for a car loan. You get the shock of your life when the dealer tells you, "sorry, but we can't get you approved." When it comes to purchasing a used car, paying your bills on time doesn't always equal good credit. Taking a closer look might reveal that you're sabotaging your credit and you don't even know it.
Maxing out your Credit Cards
Even if you are making your credit card payments on time, if you are maxing them out regularly, you're actually self-sabotaging. Dealers use credit utilization rates to help determine exactly how much of the credit you have access to you're actually using. For example, if you have three credit cards with limits totaling $5,500 and your combined available credit is only $750, this means your credit utilization rate is 76%.
Most experts recommend that you try to keep this rate below 30%. Having a high utilization rate could cause a lender to believe that you don't spend responsibly, increasing your risk of falling behind on payments, leading to a denial. Even if you are approved, you could be considered high risk. High risk approvals often come along with higher interest rates, meaning higher payments.
Not Using your Card
Some people think they are doing themselves justice by having a credit card, but not using it. The reality is that this practice doesn't necessarily hurt your credit, but it definitely doesn't help it. When you don't use your card for a long period of time, the card will go into an inactive status. Once in an inactive status, the creditor may stop reporting the card to the credit bureaus.
Most lenders want to see that you can properly manage your credit. This is achieved by having active accounts for which you regularly make payments. Having a card, making a small purchase each month and paying the bill can show this. Consider simply using your credit card to pay for fuel, lunch once a week or even a small monthly subscription. The idea is to establish a payment history.
Before heading out to purchase a used car, make certain you understand what mishaps could be keeping you from qualifying for a loan through a dealership like Auto Max.