How Refinancing an Auto Loan Can Impact Your Credit Score

Refinancing your auto loan can be a savvy financial move, but it's crucial to understand the temporary effects it may have on your credit score. Here’s what you can expect.

1. Hard Inquiries: When you apply with lenders, they pull your credit report, resulting in hard inquiries. While each can slightly lower your score, multiple inquiries within a short window are typically treated as one.
2. Decreased Average Account Age: Opening a new loan reduces the average age of your credit accounts. A shorter credit history can temporarily dip your score, as lenders prefer a longer track record of responsible borrowing.
3. Closing the Old Loan: Your original auto loan will be closed once paid off by the new lender. This isn't necessarily negative, but it does remove an established, aged account from your active credit history.
4. Building New Payment History: The most significant long-term impact comes from making consistent, on-time payments on your new loan. This positive history will help your score rebound and grow over time.

How Much Will Refinancing an Auto Loan Affect Your Credit Score?

The impact of refinancing an auto loan on your credit score varies based on several key factors. Understanding these elements can help you anticipate any changes to your credit profile.

• Hard Inquiry. Applying for a new loan triggers a hard credit inquiry from the lender, which can temporarily lower your score by a few points. This dip is usually minor and short-lived.
• Age of Credit History. Opening a new loan decreases the average age of your credit accounts, a factor in your credit score. This can cause a slight, temporary drop in your score.
• Payment History. Consistently making on-time payments on your new loan will build a positive payment history. Over the long term, this responsible behavior can help improve your credit score.

How You Can Avoid Refinancing an Auto Loan Affecting Your Credit Score

Shop for Rates Strategically

Credit scoring models often treat multiple inquiries for the same type of loan within a short window (typically 14-45 days) as a single event. Submitting all your refinance applications within this timeframe helps minimize the impact of hard inquiries on your credit score while you shop around.

Check Your Credit First

Before you apply, review your credit score and history. If your score isn't strong, it may be wise to wait and improve it. This increases your chances of approval for a lower rate, ensuring the hard inquiry on your credit report is for a worthwhile financial benefit.

Utilize Pre-qualification

Many lenders offer pre-qualification with a soft credit check, which does not affect your score. This allows you to gauge potential rates and terms without commitment, helping you decide if moving forward with a formal application and its hard inquiry is the right move for you.

Ways to Improve Your Credit Score

Improving your credit score is achievable through consistent, positive financial behavior. While it is a gradual process, following proven strategies can result in meaningful changes to your score in as little as three to six months.

• Monitor your credit reports regularly. Obtain your free reports to identify and dispute any inaccuracies or fraudulent activity that could be negatively impacting your score.
• Establish automatic bill payments. Your payment history is the most significant factor in your credit score, so setting up automatic payments ensures you never miss a due date.
• Reduce your credit utilization ratio. Aim to keep your credit usage below 30% of your total available credit, as high balances can signal risk to lenders.
• Become an authorized user. You can be added to the credit card account of someone with a strong payment history, which can help improve your own credit profile.
• Diversify your credit mix. Having a healthy combination of different credit types, such as revolving credit and installment loans, shows lenders you can manage various forms of debt.
• Limit hard inquiries. Only apply for new credit when necessary, as too many applications in a short period can temporarily lower your score.

The Bottom Line

Refinancing an auto loan can temporarily lower your credit score due to a hard inquiry. However, consistent on-time payments on the new loan can help rebuild and improve your score over time.

Frequently Asked Questions

Will refinancing my auto loan hurt my credit score?

Refinancing can cause a temporary, minor dip in your score due to the hard inquiry. However, consistent, on-time payments on the new loan can help improve it over time.

How long does a hard inquiry from an auto loan refinance stay on my credit report?

A hard inquiry stays on your credit report for two years, but its impact on your score typically lessens significantly after the first few months.

Can refinancing an auto loan improve my credit score?

Yes, it can. A lower monthly payment may improve your debt-to-income ratio, and making timely payments on the new loan demonstrates positive credit behavior, potentially boosting your score.