Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

Refinancing with poor credit

Dear Dr. Don,
I have gone through some hard times over the last few years and had to take disability retirement with Social Security income. I am 56 years old!

Getting that income started and catching up caused me to get behind a few times with credit, and inquiries have my credit score at 483. (I think my wife's score is in the mid 500s. She has a good job at age 41.) I want to take advantage of the mortgage rate drop. Could you give me any input on what to do to get my head above water?
Thanks,
Tom Turnabout

Dear Tom,
Although you don't say what the interest rate is on your current mortgage or the amount of equity you have in your home, it's unlikely that refinancing is the answer to your credit problems. Your credit history is weak, and you're not going to get a very competitive interest rate to refinance your home.

People typically refinance their homes for some combination of three reasons: to get cash out, to lower their interest rate, or to extend the term of their mortgage. Define your goal(s) before shopping for a new loan.

You also need to rebuild your credit history before you start applying for loans. Credit scores run from 300 to 900 points. If your credit score is below 670 points, you aren't likely to qualify for a lender's best rates. Only 6 percent of consumers with credit scores have scores below 549 points.

If you have enough income coming in now to meet your financial obligations, you should be able to turn things around over the next two years. Keep current on your payments, and let those current inquiries drop off your credit report. Your credit score is based on the information in your credit report, so rebuilding your credit history will boost it.

A credit inquiry (loan application) initiated by you stays on your credit report for two years. Multiple inquiries, other than comparison-shopping for an auto or a home loan within a 30-day period, send a signal to potential lenders that you are desperate for credit. When potential lenders look at your credit report and see that several of their competitors have denied you credit, it's hard for them to justify giving you a loan.

Use Bankrate's Shop and Save channel to order your Equifax credit report, FICO score, credit analysis and tips for improvement. You can order all this online for $12.50 and get the results in minutes.

-- Posted: Dec. 4, 2001