Auto loan refinancing... plz help?

[Anonymous]

One of my friend recently bought a BMW. He applied for 20,000 loan with BMW financing and was declined.

He has more than 2.5 years of credit history. He has a CU credit card and for the past one year, he was using it for heavy utilization (about 70% to 80%) without knowing the FICO scoring logic. But, he never missed any payments and used to pay off the credit card bills on time always.

When he applied for the BMW financing, he was told that his credit score 690 was the reason for declining. So, he went to his CU and they approved him a loan for a double digit rate of interest (10.5%). When asked for the reason for his low score despite paying all the bills on time, he was told about his heavy utilization and instantly they doubled his credit limit. For the last 4 months, he has been paying his loan prompty.

Now, what can he do to save some interest?

1) If he keeps this month's credit card statement reporting balance to a lower amount, will his credit score jump back to 720+? He has no other negatives on his credit report.

2) If the current score is about 720+, can he call up the CU and ask them to reduce the rate? Will they do it?

3) If the current score is about 720+ and if the CU didn't reduce the rate, can he refinance with some other bank? Does he has to wait for sometime before applying for a refinance?

Your advices could save some money for my friend. Please share.

[SCF]

Hi Jegan,

1) Utilization is a big piece of your FICO, I believe around 30%, so if your friend reduces his utilization it should have a significant impact on his scores.  Fortunately, FICO has no memory when it comes to utilization, so once the util is under control, it will bump the score up immediately and the past high utilization has no effect on his scores.

2) Calling the CU and asking them to reconsider the rate based on improved scores is not a bad idea.  The worst thing they can do is say no.

3) He can certainly re-finance elsewhere.  The only negative impact I can think of is a pre-payment penalty on his CU loan.  He would need to pay that penalty if he re-financed elsewhere.

Hope that helps!

[Anonymous]

What interest rate are you expecting him to get?

your friend has  athin credit file and is paying for that perceived increased risk by a higher rate.

With a year of ontime payments he can probably re-fi at a lower rate at either hhis CU or somewhere else.

Be aware though- at 10.5%, he will probably not find a rate much less then 6% so he is not going to see that huge a move in rate.

10.5% to 6.9% is less then 35.00 a month. Worth it? yes but not a huge amount. - More then a NETFLIX subscription but less then a cell phone bill.