Credit scoring is an effective way for lenders to screen potential borrowers. The FICO score, which has been around since 1989, is the most common. Traditional banks and online lenders use it when consumers apply to refinance car loan agreements. Their decision to approve, what interest rate to charge, and how much they’ll authorize are all based on it. Continue reading to learn more about how credit scores are calculated and the best score to refinance your vehicle.
How does FICO calculate its credit scores?
Consumers often know what range their credit score falls in because it’s printed on their credit card statements or bank statements. What’s less commonly known is how those credit scores are calculated. FICO uses an algorithm with five key categories. They are listed below, along with the percentage of the credit score each category represents.
- Payment History (35%)
- Amounts Owed (30%)
- Length of Credit History (15%)
- Credit Mix (10%)
- New Credit (10%)
The algorithm is intended to determine your financial health. Scoring high in the “payment history” and “amounts owed” categories means that you pay your bills on time and keep credit balances at a reasonable level. A good “credit mix” is when you have a mix of personal loans, mortgages, and credit cards. Too much “new credit” suggests financial immaturity.
What is a “good” credit score for car loan refinancing?
Credit scores range from 300 to 850. The “good” range is 670 to 739. Anything over that is either “very good” (740-799) or “excellent” (800-850). According to Experian, the average credit score in the United States in 2021 was 714. Lenders typically look for scores of 670 or above to approve auto refinancing, but that doesn’t mean lower scores are disqualified.
Some lenders specialize in lending to those with less than perfect credit and will approve auto refinancing for applicants with scores under 670. You’re in the “fair credit” range if your score is between 580 and 679. Some lenders may approve you in that range, but you’ll likely have to pay a higher interest rate and possibly additional fees on the loan to get that approval.
The problem with a high-cost loan is that it might not save you any money when you refinance an existing car loan. The primary purpose of refinancing is to lower your interest rate or give you smaller monthly payments. If neither of those happens, there’s no point in doing it. It would be best to work on improving your credit score and trying again later on down the line.
When to Refinance Your Car Loan?
Now that you know how credit scores are calculated and what lenders look for let’s review when to refinance a car loan. The best time to do so is before the halfway point of the loan term, but not within the first six months. If you wait too long, savings will be minimal. If you attempt to refinance too soon, the lender may not approve you.
Another great time to refinance is if you foresee that you may fall behind on your monthly payments due to things like unexpected expenses, loss of a job, or reduced income. Be proactive before this happens. Late payments can seriously damage your credit score, and too many of them could result in your car getting repossessed. Auto refinancing is available at most banks, credit unions, and online lenders.
The Bottom Line
Viewing your credit score to get an idea of where you stand before applying to refinance your car loan is best. Make sure you apply at an optimal time that will save you money in the long run. If the numbers don’t add up as you expected, continue working toward increasing your credit score with good financial habits.
Notice: Information provided in this article is for information purposes only and does not necessarily reflect the views of [publisher] or its employees. Please be sure to consult your financial advisor about your financial circumstances and options. This site may receive compensation from advertisers for links to third-party websites.
