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Does Refinancing a Car Hurt Your Credit?

Refinance symbol. Wooden cubes with word 'refinance'. Yellow light bulb. Beautiful orange background. Business and refinance concept. Copy space.
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If you’re looking to refinance your car, you may be wondering if it might hurt your credit score. The answer isn’t always clear-cut, but in most cases, refinancing a car will not significantly impact your credit. However, you should keep a few things in mind before refinancing. Read on to learn how refinancing a car can affect your credit and explore some tips to help you improve your score.

What Is Car Refinancing?

Car refinancing is the process of taking out a new loan to repay your existing car loan. The new loan pays off your current loan balance, so you then make payments on the new loan. You can refinance your loan for various reasons, such as getting a lower interest rate, reducing monthly payments, or paying off the loan faster. Whatever your reason for considering car refinancing, it’s important to understand the process and compare offers from multiple lenders before making a decision.

What Is Credit Score and How Is It Calculated?

Your credit score is one of your most important pieces of financial information. Lenders use this three-digit number to determine everything from whether you qualify for a loan to what interest rate you’ll pay. But how is this number calculated, and what factors can impact your score?

FICO is the most common credit-scoring model in the United States, with more than 90% of lenders using it. FICO scores range from 300 to 850 — the higher your score, the better. Five factors are used to calculate your FICO score: payment history (35%), credit utilization (30%), length of credit history (15%), credit mix (10%), and new credit (10%).

Credit scoring awards points for each factor, with the most important factors having the most significant impact on your score. For example, if you have a long history of making timely payments, that will be worth more points than if you have a shorter history.

How Does Refinancing a Car Loan Work?

Refinancing a car is similar to getting a new loan in that you’ll need to fill out an application and provide financial information to the lender. The lender will then review your credit history and other factors to determine whether you qualify for refinancing and, if so, at what interest rate. If approved, the lender will pay off your current loan, and you’ll begin making payments on the new loan.

In most cases, you can choose to extend the term of your loan, which will lower your monthly payments but increase the amount of interest you pay over the life of the loan. You can also choose to keep the same term as your current loan, which could raise your monthly payments but save you money in interest over time.

When Should You Refinance Your Car Loan?

A decision as big as auto refinancing will impact your monthly budget and overall financial health, so it’s important to think carefully before making a move. Here are a few things to consider before refinancing your car loan:

  • Your credit score: Check your credit score to see if it has improved since you initially financed your car. If your score has gone up, you may be able to qualify for a lower interest rate, which could save you money over the life of your loan.
  • Your financial situation: If you’re in a position where you can no longer afford your monthly car payments, refinancing may give you some breathing room by extending the term of your loan and lowering your monthly payment.
  • The remaining balance on your loan: If you have paid down a significant portion of your loan, you may be able to save money by refinancing at a lower interest rate.
  • The current interest rate on your loan: If rates have dropped since you originally financed your car, you may be able to save money by refinancing at a lower rate.
  • The value of your car: If your vehicle is worth more than you owe on your loan, you may be able to use the equity to finance a new car.

Does Refinancing a Car Hurt Your Credit Score?

In a perfect world, refinancing your car loan would not hurt your credit score. However, in the real world, a few things can happen that could cause your score to go up or down. Let’s dive deeper into how car refinancing can impact your credit.

Hard Inquiry

When you apply for a car loan, the lender will run a hard inquiry on your credit report. This type of inquiry can temporarily lower your credit score by a few points.

Multiple Loan Applications

Applying for multiple loans in a short period can also hurt your credit score. If you’re considering refinancing your car loan, compare offers from multiple lenders before actually applying to ensure you get the best deal.

Closed Account

Car refinancing involves taking out a new loan to repay your existing loan. This means that you’ll have two car loans on your credit report, and when you pay off the first loan, it will be reported as closed. While having a mix of open and closed accounts is good for your credit score, having too many closed accounts can hurt your score.

Tips To Improve Your Credit Score for Car Refinancing

If you’re considering refinancing your car loan, there are a few things you can do to improve your chances of getting approved and get the best interest rate possible:

  • Check your credit report and score to identify any potential red flags
  • Make all of your payments on time and in full
  • Hold off on closing credit cards
  • Keep your credit card balances low
  • Avoid opening new lines of credit
  • Reduce your credit utilization
  • Shop around for the best interest rate

The bottom line is that refinancing a car loan can positively and negatively affect your credit score. If you’re considering refinancing, it’s vital to understand the process and compare offers from multiple lenders before making a decision. Once you’ve refinanced your car loan, manage your new loan carefully to avoid hurting your credit score.

FIXD Research Team

At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.

We’re here to help you simplify car care and save, so this post may contain affiliate links to help you do just that. If you click on a link and take action, we may earn a commission. However, the analysis and opinions expressed are our own.

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FIXD Research Team

FIXD Research Team

At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.

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