When it comes to refinancing a car, one of the most important factors that lenders consider is your credit score. This three-digit number is a reflection of your creditworthiness and plays a crucial role in determining the terms and interest rates for your car loan.
What is a Credit Score?Before we dive into the specifics of refinancing a car, let's first understand what a credit score is. Simply put, it is a numerical representation of your credit history and financial behavior. It is calculated based on various factors such as your payment history, credit utilization, length of credit history, types of credit, and new credit. The most commonly used credit score model is the FICO score, which ranges from 300 to 850.
The higher your score, the better your creditworthiness. A score above 700 is considered good, while anything above 800 is excellent.
Why is Your Credit Score Important for Car Refinancing?When you apply for a car loan, lenders use your credit score to assess the risk of lending you money. A higher credit score indicates that you are a responsible borrower who is likely to make timely payments. This makes you less risky in the eyes of lenders, and they may offer you better terms and interest rates. Similarly, when refinancing a car, lenders will also look at your credit score to determine the terms of your new loan.
If your credit score has improved since you first took out the car loan, you may be eligible for a lower interest rate, which can save you thousands of dollars over the life of the loan.
Which Credit Score Do Lenders Use for Car Refinancing?Now that we understand the importance of credit scores in car refinancing, the next question is, which credit score do lenders look at? The answer is not as straightforward as you may think. When you apply for a car loan, lenders typically use your FICO Auto Score, which is specifically designed to assess your creditworthiness for auto loans. This score takes into account factors such as your payment history, credit mix, and new credit, but places more emphasis on your history with auto loans. However, when it comes to refinancing a car, lenders may also consider your FICO Score 8, which is the most commonly used FICO score. This score is calculated based on your overall credit history and may differ from your FICO Auto Score.
Other Factors That Lenders Consider for Car RefinancingWhile your credit score is a crucial factor in determining the terms of your car refinancing loan, it is not the only thing that lenders consider. They will also look at other factors such as your income, employment history, and debt-to-income ratio. Your income and employment history show lenders that you have a stable source of income and are capable of making timely payments.
Your debt-to-income ratio, on the other hand, gives them an idea of how much of your income goes towards paying off debt. A lower debt-to-income ratio indicates that you have enough disposable income to comfortably make payments on your refinanced car loan.
How to Improve Your Credit Score for Car RefinancingIf you are planning to refinance your car in the near future, it's a good idea to work on improving your credit score beforehand. Here are a few tips to help you boost your credit score:
- Make timely payments: Your payment history makes up 35% of your credit score, so it's crucial to make all your payments on time.
- Keep your credit utilization low: Your credit utilization, or the amount of credit you are using compared to your total available credit, makes up 30% of your credit score. Aim to keep it below 30%.
- Don't open too many new accounts: Opening multiple new accounts in a short period can negatively impact your credit score.
Only apply for new credit when necessary.
- Check your credit report regularly: Errors on your credit report can bring down your score. Make sure to check your report regularly and dispute any inaccuracies.