Does refinancing a car hurt your credit score?


Refinancing your car loan has the potential to secure better terms and create breathing room in your budget. However, you might be wondering, does refinancing a car loan hurt your credit score?

While there's a likelihood of a slight credit score dip, don't let that deter you from exploring auto loan refinancing. This decision could be a wise financial move, offering savings and much-needed relief. Here's a closer look at how refinancing affects your credit:

How does refinancing impact your credit?

Refinancing a car loan can influence your credit score. Credit scores consider various factors like payment history, debt owed, credit history length, and recent credit applications, such as those for refinancing.

Here's a breakdown of how the refinancing process affects your credit:

1. Generates hard inquiries: Applying for a new loan leads to hard credit inquiries, causing a temporary score decrease. Although these inquiries last on your report for up to two years, they impact your score for only 12 months. Therefore, the act of refinancing may slightly lower your credit score.

2. Lowers accounts’ average age: Refinancing decreases the average age of your accounts, contributing to a potential dip in your credit score. Luckily, account age comprises only 15% of your credit score. With responsible management of your new auto loan and other debts, your score should recover quickly.

3. Higher impact if reported as a new loan: If your refinance is reported as a "new" loan, it can have a more significant effect. This not only triggers a credit inquiry but also signals a new "open date" on your profile, indicating a new debt obligation.

How long will my credit score be affected by refinancing?

The credit score effects of refinancing are temporary. With consistent payments, your score should bounce back within a few months. Any hard inquiry impacts related to refinancing will completely fall off your record within a year.

Tips to limit harm to your credit score:

To minimize the impact on your credit score during refinancing, consider these tips:

1. Get prequalified: Explore refinancing options from different lenders and get prequalified to view potential offers without affecting your credit score.

2. Apply within a certain window: Submit loan applications within a specific timeframe (14 to 45 days) to have them grouped as a single inquiry, minimizing the impact.

3. Make timely payments: Timely auto loan payments significantly influence your credit score. Consistency in payments will aid in your score's recovery.

4. Wait to open additional credit accounts: Delay opening new credit accounts after refinancing to improve your credit age and potentially raise your score over time.

The bottom line

While refinancing may cause a temporary credit score dip, the potential financial benefits often outweigh the drawbacks. Understanding the process, exploring lenders, and making informed decisions are crucial steps before deciding if refinancing aligns with your goals.

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