 Dear
Dr. Don,
I bought my house and a car about a year ago when my credit score was about 540. My mortgage loan was for $128,900 at 7.25 percent and I have a $1,500 monthly mortgage payment. My car loan is at 23 percent and I pay $500 a month. I'm never late on my car or mortgage payments.
Should
I try to get a secured credit card to boost my
credit before trying to refinance the car and
the house, or should I take a shot at trying to
refinance now? I make roughly $43,000 a year in
my main job and I work part time in a second job.
Please help me make the right decision.
-- Celena Credit
 Dear
Celena,
First things first: Get an updated credit score
from at least one of the three main credit bureaus.
You have to pay for it, but it'll be worth the
$10 to $15 to see where you stand after a year
of paying these two loans on time. Bankrate has
the contact
information for all three firms.
If you have a 30-year fixed rate
mortgage at 7.25 percent, you may not be able
to do all that much better on a refinancing, even
with an improved credit score. As I write this,
the Bankrate national average for a 30-year fixed
rate loan is 6.29 percent, and that's for an A
credit rating. You're not likely to have made
it from an F to an A in just one short year. You'll
need a credit score in the upper 600s (660 to 699)
before you'll see much of an improvement on your
existing mortgage rate. If you're to at least
that point, then you can take a look at a mortgage
refinancing calculator to see how long it
will take you to recoup your closing costs on
a mortgage refinancing.
I was taken aback when you told
me your car loan is at 23 percent. You're far
more likely to improve on this rate than you are
on your mortgage, assuming that there's no prepayment
penalty on the loan and that the loan doesn't
use the "Rule of 78s" to calculate how interest
is paid. The Bankrate feature, "Steer
clear of the perilous 'Rule of 78s'," explains
the rule in greater detail. Take a look at your
loan agreement, too.
I don't think you need a secured credit card to boost your credit rating before attempting a refinance. A secured card doesn't do much for you, except for demonstrating a payment history, and you're already doing that with the car loan and the mortgage. I think you need to work on getting the car paid off -- again, assuming no prepayment penalty on that loan. Making additional principal payments on the car to reduce its loan balance is the first place to attack your bills.
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