This thought came up while I was reading another thread and I thought it might be a good opportunity to share something that is one of the least understood principles about your credit score and credit ratings. Someone raised the issue on A/S a few times about how financing a new car can hurt your credit so I wanted to bring some clarity to this because this is partially true.
One of the factors that contribute to your credit score is your debt to credit ratio..meaning the ratio between the total amount of credit that you have been extended to the total amount of it that you have actually used and have balances on. So for instance, if you have 4 credit cards each with a $500 limit, you have $2000 of available credit. And then if you have a total of $600 in balances on your cards collectively, your debt to credit ratio is about 30%...which is good.
But when you get that new car and finance it for $20K, your total available credit becomes $22,000. And because you used $20K to make the purchase, your debt ratio is now 94%...which is not-so-good. As a side note, if you have ever heard of someone's credit score going down after they closed out some of their credit card accounts, it's usually because they reduced their amount of available credit and increased their debt ratio.
So anyway, for the same reason, there are people who can finance new cars all of the time and not have their credit affected simply because they had plenty of available credit that they weren't using. My uncle has a credit card from American Express with a $100,000 limit and a couple of other lines of personal credit. Whenever he goes out to buy a new car, his score is hardly affected because his available credit is very high but the balances that he maintains is a little less than half of what he has access to.
So anyhow, if you guys have any questions regarding credit, how the system works, etc, I'd be glad to answer them as I enjoy studying the system and mastering the interworkings of it.
One of the factors that contribute to your credit score is your debt to credit ratio..meaning the ratio between the total amount of credit that you have been extended to the total amount of it that you have actually used and have balances on. So for instance, if you have 4 credit cards each with a $500 limit, you have $2000 of available credit. And then if you have a total of $600 in balances on your cards collectively, your debt to credit ratio is about 30%...which is good.
But when you get that new car and finance it for $20K, your total available credit becomes $22,000. And because you used $20K to make the purchase, your debt ratio is now 94%...which is not-so-good. As a side note, if you have ever heard of someone's credit score going down after they closed out some of their credit card accounts, it's usually because they reduced their amount of available credit and increased their debt ratio.
So anyway, for the same reason, there are people who can finance new cars all of the time and not have their credit affected simply because they had plenty of available credit that they weren't using. My uncle has a credit card from American Express with a $100,000 limit and a couple of other lines of personal credit. Whenever he goes out to buy a new car, his score is hardly affected because his available credit is very high but the balances that he maintains is a little less than half of what he has access to.
So anyhow, if you guys have any questions regarding credit, how the system works, etc, I'd be glad to answer them as I enjoy studying the system and mastering the interworkings of it.