Do You Have to Have Excellent Credit to Refinance?

Paying off a loan with another loan, called refinancing, can save you money on finance charges and lower your monthly bills. Although excellent credit maximizes the benefits of refinancing, refinancing can benefit you even if you have less than stellar credit. However, you always benefit from improving your credit before refinancing.

Identification

You do not have to have excellent credit to refinance. A lender allows you to apply with any credit score and then makes a decision based on your application as a whole. Because a refinancing loan requires the same standards as any other loan, an excellent credit rating gives you a better chance at receiving approval than a good or worse credit score.

Disadvantages of Poor Credit

A less-than-excellent credit score -- anything above 760 is excellent -- may mean refinancing won't make your loan cheaper. A good credit rating may help if you had a poor or average credit rating when you originally applied for a loan. You might also want to refinance if interest rates for the market in general have dropped significantly since your first loan application.

Other Considerations

A credit rating is just one factor a lender considers when you ask for a refinance loan, especially for a mortgage or auto loan. For instance, if you own 70 percent of your property, the lender might consider you a lower risk than someone who only owns 10 percent equity in his home with a better credit history. You also can receive a lower interest rate if you have a high monthly debt-to-income ratio.

Tip

Calculate how much you can save by refinancing. Several websites, such as Bankrate.com, have tools that tell you how much you will save by refinancing. It can take years to break even on a refinance loan after origination fees. If you want to refinance because you cannot afford payments, talk to your lender first -- because it may help you make your monthly payments more affordable than refinancing, which usually requires a credit check that lowers your credit score a few points. Also, improve your credit months before applying for a refinance loan, such as by eliminating credit-card debt and paying every bill on time.