Does Refinancing A Car Hurt Your Credit?

Written by Banks Editorial Team
4 min. read
Written by Banks Editorial Team
4 min. read

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Are you thinking about refinancing your car loan? It could drop your credit score in the short term but lower your car payments and possibly save you a bundle in interest. Here’s how auto loan refinancing works and the potential impact it can have on your credit score. 

How Does Auto Refinancing Work?

When you refinance your car loan, you use a new loan to pay off your existing loan. The idea is to get a loan with a more competitive interest rate, and you’ll likely get a lower monthly payment as you’ll reset the loan term. Depending on the new interest rate, you could save money if your new rate is far lower. Still, some borrowers actually pay more in interest over the life of the loan as the lender has more time to collect from you. 

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How Do Credit Scores Work?

It’s ideal to understand how credit scores work before diving into how auto loan refinancing hurts your credit score. Here’s a breakdown of how your credit score is calculated: 

  • Payment history (35%): If your credit card or loan accounts reach 30 days past due, the lender may report the delinquency to the credit bureaus. This negative mark could hurt your credit score by several points. 
  • Amounts owed (30%): Your credit utilization ratio, or the amount of your credit limit in use, is the most significant factor in this category. So, if your credit limits across the board equal $1,000 and you’re carrying a balance of $250, your credit utilization is 25 percent. It’s best to keep this ratio at 30 percent or lower to get yourself the best shot at a good or excellent credit score.  
  • Length of credit history (15%): The longer you’ve had credit history, the better your score. 
  • Credit mix (10%): Lenders want to know that you can manage both revolving (i.e. credit cards) and installment (i.e. loans) accounts. 
  • New accounts (10%): applying for too much credit in a short span is a red flag to lenders and could hurt your credit score. Rate shopping is an exception to the rule. More on that shortly.

Quick note: This is the formula for the FICO score, which 90 percent of creditors use to make a lending decision. Other less popular credit scoring models, like VantageScore, use variations of this calculation or a different formula altogether. 

Will Refinancing A Car Hurt Your Credit Score?

Credit History Inquiry

Each time you apply for a loan product, a hard inquiry will appear on your credit report. It could drop your credit score by a few points, but the impact is usually temporary and doesn’t last longer than six months. 

Multiple Inquiries

The FICO scoring model does not punish you for applying with multiple lenders when shopping for a new car loan. Instead, several inquiries generated in a short period only count as a single inquiry, so your credit score won’t tank. 

Closing An Established Account

Depending on how long your current loan has been open, closing the account could hurt your credit score as your average age of accounts will decrease. 

Opening a New Account

To piggyback off the last point, opening a new auto loan will also lower the average age of your credit accounts. In turn, your credit score could take a hit in the short term. 

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How To Reduce The Impact On Credit Score

Check Your Credit First

Before applying for auto loans, know where your credit score stands. It can be lower than you expected, which could make it challenging to get approved for a loan with favorable terms. But when you check your score, you’ll know where you stand and if it’s best to work on improving your credit score before applying and getting hard inquiries on your report.

Some lenders offer prequalification tools on their websites that let you view potential loan offers without impacting your credit score. You can input your information to gauge your approval odds if you need to refinance your car loan sooner than later. 

Fix Any Errors On Credit Report   

The information on your credit report is used to calculate your credit score. Therefore, if you notice errors or outdated information when you review your credit report, file disputes promptly to have any information removed that could be dragging your score down. 

Apply Within a Short Timeframe

As mentioned above, the FICO scoring model permits a 45-day “rate shopping” period. Try to complete your search for the perfect auto loan to minimize the impact on your credit score. 

Auto Refinancing FAQs

How many points does your credit score drop when you refinance a car?

Your credit score could dip a bit when you apply for an auto loan, and it may drop a bit more when you finalize the transaction. However, the effect is usually short-lived, and your score will start to improve over time if you make timely payments on the new loan and manage your other outstanding debt obligations responsibly.

Can you refinance a car with bad credit?

It’s possible to refinance your auto loan with bad credit, but you’ll likely get a higher interest rate if your credit score was higher when you took out the current loan. Ideally, you want to improve your credit score before refinancing to secure competitive loan terms. But if your goal is to reduce your monthly auto loan payments, consider refinancing with a lender that caters to borrowers with less than perfect credit.

Is Refinancing A Car Worth It?

If you are wondering if you should refinance a car loan, this will depend on your financial situation and motivation to refinance. However, it could be a sensible move if: 

  • Your credit score has improved, and you believe you can qualify for a lower rate. 
  • The average interest rates are far lower than they were when you secured your auto loan. 
  • You want a more affordable car payment to free up cash for other financial goals. 
  • Your car’s resale value is equal to or greater than what you currently owe. 
  • You want to add or remove a co-borrower. 
  • You can afford the monthly payment but want a lower interest rate so you can pay the loan off sooner and save in interest. 

When you’re ready to move forward with refinancing your car loan, add Auto Approve to your list of lenders to research. They work with an extensive network of lenders to get you approved for an auto loan that fits your needs and budget.

Rates start at 2.25 percent, and it only takes a few minutes to get your quote. Best of all, it’s quick, simple and won’t impact your credit score. Visit their website and use the online form to get started and secure the auto loan you need and deserve. 

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