Many people who own businesses choose to refinance their vehicles in order to get lower interest rates or to free up capital for day-to-day expenses. If you are looking for a refinance loan but are uneasy about the process because of myths you have heard surrounding credit scores, this article should reassure you.
What are Credit Scores?
Simply put, they are three-digit scores assigned to you based upon your history of borrowing money and paying it back. There are three main companies that create the scores, and they all report to FICO. The acronym stands for Fair Isaac Corporation. Having a score under 580 indicates poor credit risks, and scores of 670 or over tell lenders you are a good credit risk. Obviously, the higher the scores within this range, the better your chances will be of acquiring a car refinance loan at a good interest rate.
Credit Score Myths
There are a lot of myths that constantly circulate about credit scores, and this might be keeping you from applying for that refinance. Here are four of the major ones and information to set your mind at rest.
The Less You Borrow, the Better Your Score
Again, the scores are based upon your history of borrowing and repaying loans. If you don’t have a history of credit use, you will have no credit score. Lenders rely upon your credit history to decide whether you represent a high risk of defaulting on a loan. So, if you have no credit score, they may be reluctant to lend you money. This is why companies offer prepaid credit cards. Using them to build a positive credit history is a great tool for raising your credit score.
Your Spouse can Affect Your Credit Score
Your credit history is built upon transactions in your name. Your spouse’s credit does not impact your score negatively or positively. The exception is that you are affected by your spouse’s history (or your child’s, for that matter) if you have co-signed for a loan or have a joint bank account. That is why it is important to consider ramifications before signing for a loan with someone, and the sooner your name is removed from such a transaction, the lower the risk is to your credit.
Low Credit Score means You Won’t be Approved
You can certainly get a loan, even if you have a low credit score. Because you are asking the lender to assume the risk that you might not be able to make timely payments, your interest rates may be higher. Loans are products that companies sell, and they make profits from them. That said, someone with a high credit score which represents a low risk to the lender, may pay hundreds or thousands of dollars less in interest over the life of the loan than someone with a low score. As per the experts at Lantern by SOFI, “Lenders handle refinance loans on a case-by-case basis”, so you should still be able to get a loan with a low credit score.
Your Score Follows Your Address
One myth is that if the previous owner of your home had bad credit, it would affect your score. Your credit score is linked to your identity. Your physical address is noted in the personal information collected by lenders, but that is only to verify that it is you who is applying for the loan. The score of the previous occupant of your home should not affect your credit score. Still, it is important for you to get a change-of-address form completed as soon as possible with the post office and to record your new address on all documents.
Using credit responsibly is an important skill to acquire. Companies such as Lantern, with their lender-partners, can help you with refinancing car loans so that you can build or raise your credit scores.