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People weighing the pros and cons of auto refinancing often want to know, “Does it hurt your credit to refinance your car?” After all, any time you change up one aspect of your finances, it could potentially affect other areas of your financial life as well.
In general, refinancing your car is unlikely to have a serious negative impact on your credit, but there are some situations you should watch out for. In the article below, we’ll break down how refinancing affects your credit, when it’s possible your score might drop, and how to protect your credit from negative effects.
When you refinance your car loan, it may cause a small, temporary dip in your credit score. This dip is usually just a few points — less than 5, for most people — and normally goes away after a short while.
In some cases, refinancing your car loan can actually improve your credit and raise your credit score. Managing your auto loan well and making all of your payments on time shows the credit scoring bureaus that you are a responsible borrower. In fact, the biggest factor affecting your credit score is how consistently you make timely payments.
There are a couple of ways that auto loan refinancing affects your credit. The main causes for a credit impact are rate shopping and adding a fresh new loan to your credit report. Here’s how those factors play out.
The first thing to know is that shopping for a new refinance loan usually results in the lender running a hard credit check on your report. A single hard credit inquiry can drop your score by a few points. If you’re shopping for a new loan, you might apply with multiple lenders to find a great offer (and that’s smart!). Fortunately, credit bureaus understand this, so as long as you do your rate shopping in a short period of time, like within two weeks, they’ll all be counted as just one inquiry. Otherwise, each additional hard inquiry could drop your score further.
Don’t let this potential credit score dip discourage you from shopping for a great loan offer. Most credit models treat similar auto loan inquiries as a single event, and rate shopping is the best way to find a great rate and save money on your new loan.
Length of credit history is another factor that affects your credit. On scoring models like FICO, 15% of your score is determined by how new or old your credit accounts are. When you refinance your auto loan, the new loan replaces the old loan. The old loan is paid off and closed. The new loan then appears on your credit report.
This makes it look like the age of your account is quite young, even though you’ve been paying on the old loan for some time. This shift in account age is usually neutral, though, and as you pay on the new loan, it can even become positive over time. Just keep making your payments by the due date.
The good news is that an auto refinance loan can actually help you improve your credit and raise your score.
When you refinance for lower monthly payments, it can make it easier for you to stay current on your loan and other debts. Since the payments are smaller and eat up less of your monthly income, you’ll be able to make your payments on time and in full each month. Good payment history like that makes up 35% of your credit score, and it’s one of the best things you can do for your credit.
Not only does refinancing affect credit positively in that way, but you might save money on interest if you refinance at a lower rate. Use that cash to pay down other debt, and you could boost your credit score even further.
There are some situations where refinancing does hurt your credit, but these are usually due to your behavior after the refinance, not the refinancing itself.
For example, you might see a negative impact on your credit if you miss one or more loan payments. Remember, timely repayment has a big effect on your credit score.
Another way refinancing could impact your credit is if you spread out your loan applications over a long period of time — multiple months instead of multiple days or weeks. That’s because each credit application needs to be close together for it to count as one inquiry to the credit bureaus.
It’s possible to refinance your auto loan with minimal impact on your credit score. The key is that timing matters. Make sure you’re ready to begin the auto refinancing process before you start rate shopping. Keep all of your loan applications and pre-approvals to a 14-day window to minimize the hit to your credit.
Once you decide on a lender, choose a monthly payment that fits comfortably into your budget. Make sure you leave plenty of room to pay your other bills on time, too. Set a reminder or arrange for autopay to deduct your new loan payment right from your bank account, so you never miss a payment. Over time, keeping healthy borrowing habits like these will help improve your credit.
If you’re worried it might hurt your credit to refinance your car, it’s smart to explore all the angles. While it’s possible your score might drop a few points, it could be worth it if the refinance helps you lower your payment or save money on interest. And remember, a small hit from a hard credit inquiry is temporary. Your score should return to normal after a time.
Use an auto refinancing calculator to see how much you could save and be sure to weigh all the pros and cons before you make your decision.
Refinancing a car loan shouldn’t be bad for your credit. There may be a small, temporary dip in your credit score after applying for the refinance loan. But if refinancing makes it easier for you to make your car payment each month, it could actually help build your credit over time.
The exact amount varies from person to person, but it’s typically quite small. Most people see a dip of fewer than 5 points, according to FICO.
The drop from the hard inquiry on your credit report is generally short-lived. Hard inquiries stay on your credit report for two years, but they’ll stop affecting your credit score after 12 months.
It’s possible, if you refinance several times in a short period of time. Each time you apply for a new refinance loan, the lender will run a hard inquiry on your credit report. Although one hard inquiry has a relatively small effect on your credit, several of them in a row could add up to a bigger hit to your credit.
Your timely payments following a refinance can improve your credit score over time. Many people refinance their auto loan to lower their monthly payment, which usually makes it easier for them to pay their bills on time every month. Responsibly repaying your loans has a positive impact on your credit.
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