Refinancing your car loan might hurt your credit a little, but this isn’t something to worry about. You could see a drop of a few points, but your score should bounce back within a few months as long as you make your loan payments on time.
Despite this temporary dip in your credit score, refinancing your car can bring some positives. Lower car payments could free up more cash each month and provide some financial relief, and these benefits could outweigh the minor, short-term impact on your credit.
In the end, it’s all about weighing the pros and cons and deciding whether the potential gains from refinancing your car loan are worth the temporary decline in your credit score.
If it helps you meet your financial goals and you’re comfortable with a temporary change in your credit, refinancing might be the way to go.
How Does Refinancing Affect Your Credit?
Refinancing your car loan can indeed affect your credit profile. Both FICO and Vantage Score, the primary credit scoring models used by lenders, consider factors like payment history, debt load, and credit inquiries when calculating your credit score. Let’s dive into how refinancing impacts each of these factors:
- Credit inquiries: Applying for a refinanced loan results in a hard inquiry on your credit report, possibly causing a slight temporary dip in your score. These inquiries stay on your report for up to two years but only impact your score for about 12 months.
- Age of accounts: Refinancing may lower the average age of your credit accounts, potentially leading to a slight decrease in your score. However, this factor only accounts for 15% of your FICO score, so it should recover quickly with responsible loan management.
- New loan reporting: If your refinanced loan is reported as a new loan, it might have a more significant impact on your credit profile. This is because it adds a new “open date” and debt obligation, which may affect your overall debt load.
While refinancing your car loan might temporarily impact your credit, staying on top of your payments and managing your debt responsibly can help your credit score bounce back in no time.
How to Limit Harm to Your Credit Score
To minimize the impact of refinancing your car loan on your credit score, consider the following strategies:
- Get prequalified: First, research and compare lenders to find the best refinancing offers. Then, get prequalified with your top choices to see potential offers without affecting your credit score.
- Apply within a short timeframe: Submitting loan applications within 14 days (or up to 45 days for some credit scoring models) can group them into a single inquiry, reducing the impact on your score.
- Make on-time loan payments: Since payment history contributes significantly to your credit score, consistently making timely auto loan payments will help your score recover.
- Hold off on opening new credit accounts: Refinancing can reduce the average age of your credit accounts. Waiting to open additional accounts allows your credit score to improve, positively impacting your credit score over time.
- Utilize Experian Boost: This optional program helps you boost your credit score by factoring in payments for daily expenses like streaming services, rent, and utilities. Participants have reported an average 13-point increase in their FICO-8 score.
By using these strategies, you can reduce the impact of refinancing on your credit score and keep your credit profile strong.
Frequently Asked Questions
Does refinancing a car always hurt your credit?
Refinancing a car may cause a temporary dip in your credit score due to the hard inquiry from the refinancing application. However, the long-term impact can be positive if the refinancing results in lower monthly payments and better loan terms.
How much does refinancing a car affect your credit score?
The impact of refinancing a car on your credit score varies based on your overall credit history. Typically, a hard inquiry may lower your score by a few points, but it’s generally a temporary effect.
Can shopping around for car refinancing options hurt my credit?
Shopping around for refinancing options can result in multiple hard inquiries, which could hurt your credit score.
However, if you submit all applications within a 14- to 45-day window, credit scoring models may group these inquiries as a single event, minimizing the impact on your score.
Does refinancing a car impact my credit history?
Refinancing a car loan can impact the average age of your credit accounts, especially if you’ve had the original loan for a significant duration. However, the impact is generally minor and temporary.
How does refinancing a car affect my credit utilization rate?
Refinancing a car loan typically doesn’t have a significant impact on your credit utilization rate, as car loans are considered installment credit rather than revolving credit, like credit cards.
Does refinancing a car hurt my credit more than getting a new car loan?
The impact of refinancing a car loan and obtaining a new car loan on your credit score is generally similar. Both result in a hard inquiry and temporarily affect the average age of your credit accounts.
How long does it take for my credit score to recover after refinancing a car?
Your credit score can recover within a few months after refinancing a car, as long as you maintain good credit habits, such as making on-time payments and maintaining your credit utilization.
