Does Refinancing a Car Hurt Your Credit?
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Refinancing your auto loan can negatively affect your credit score, but not for the long term. Your credit score may drop a few points, but it should rebound in a short time — usually after a few months of on-time loan payments.
The possible benefits from refinancing a car — such as lower car payments and breathing room in your budget — may outweigh the downside of a slight, temporary decrease in your credit score.
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Why auto loan refinancing can lower your credit score
Car loan refinancing involves replacing your current auto loan with a new one, usually with a different lender. Refinancing might make sense if you want to reduce your interest rate, lower your monthly car payment, change your loan term or remove a co-applicant.
Applying to refinance your car loan is really applying for a new loan, so it can affect your credit score in several ways:
A hard inquiry on your credit report
When you apply for a loan, at some point in the process a lender will do a credit check that appears as a hard credit inquiry on your credit report. Typically a hard credit inquiry causes a small reduction in your credit score. For example, credit-scoring company FICO says a single credit inquiry can shave up to 5 points off your credit score.
Changes to average age of credit accounts
As previously noted, when you refinance and replace your old loan with a new one, it means that the original loan is paid off early. This can reduce the length of your credit history and average age of accounts — two factors that contribute to your credit score. The effect should be minimal though, since length of credit history is only 15% of a person’s total FICO score. For VantageScore, a credit-scoring company used by many auto lenders, age of credit history is listed as a “less influential” factor.
New account on your credit profile
If you qualify for and accept a loan offer, you'll typically see another small credit score dip. That’s because the new loan on your credit profile may indicate to a credit bureau that you’ve taken on new debt and increased your debt load. However, since the new loan replaces an existing one, especially if it’s about the same amount, any impact to your credit score should be minimal.
How to reduce the impact on your credit score
When refinancing a car, there are steps you can take to minimize the effect on your credit score.
Use pre-qualification to research auto refinance loans
If you’re uncertain whether you would qualify for an auto refinance loan, or you’re curious about what rate you might get, look for lenders that offer pre-qualification with a soft credit check.
Pre-qualification, when done with a soft credit inquiry, won’t affect your credit score. It doesn’t guarantee loan approval and rate estimates can change later in the process, but it’s useful for research prior to proceeding with a loan application — which will result in a hard credit inquiry.
When applying to multiple lenders, do it in a compact time frame
If you apply to more than one lender to compare and find the best and lowest-rate auto refinancing, it will result in multiple hard credit inquiries. The good news is that car loan inquiries done in a short window are typically considered to be one inquiry by credit-reporting companies.
VantageScore gives you a rolling 14-day period; FICO gives you 45 days. For less impact on your credit score, it's smart to submit all auto loan refinancing applications within these time frames.
How long will auto refinancing affect your credit score?
If you manage your credit accounts well and make all payments on time, your score should recover in a short time — usually a few months. The hard credit inquiry will stay on your credit report for about two years, but it should stop affecting your credit score in less than a year.
When deciding whether to refinance your car, weigh the advantages — such as saving money with a lower interest rate — against the disadvantages of a slight and temporary decrease in your credit score.
