Refinancing your auto loan can lower your credit score, but the impact is less if you keep the application process within 14 days.
Your credit score may drop a few points (typically around five), but it should rebound after a few months of on-time loan payments. And the possible benefits of refinancing a car loan, such as lower payments, may outweigh a temporary decrease in your credit score.
Why auto loan refinancing can lower your credit score
Car loan refinancing replaces your current auto loan with a new one. Whether you refinance with a different lender or your current one, you're applying for a new loan. This can affect your credit score in several ways.
Adds a hard inquiry on your credit report
When you apply for a loan, a lender runs a credit check that appears as a hard credit inquiry on your credit report. A hard credit inquiry typically causes a small dip in your credit score. For example, credit-scoring company FICO says a single credit inquiry can shave up to 5 points off your credit score.
Changes the average age of credit accounts
Replacing your old loan with a new one means the original loan is paid off early. This can reduce the length of your credit history and average age of accounts, two factors that contribute to your credit score.
The effect should be minimal, though, because the length of your credit history makes up only 15% of your total FICO score. For VantageScore, another credit-scoring company used by many auto lenders, age of credit history is part of what is called your “credit depth,” which makes up 20% of your score.
Adds a new account on your credit profile
If you accept a loan offer, the dip in your credit score might be a bit bigger than if you’d applied for the loan but not accepted it. That’s because the new loan on your credit profile shows that you’ve taken on new debt, which increases your total debt.
However, since the new loan replaces an existing one, especially if it’s about the same amount, the impact to your credit score should be minimal.
How to reduce the impact on your credit score
When refinancing a car, you can take steps to minimize the effect on your credit score:
Use pre-qualification to research auto refinance loans
If you’re uncertain whether you would qualify for an auto refinance loan, or you’re curious about what rate you might get, look for lenders that offer pre-qualification with a soft credit check.
Pre-qualification with a soft credit inquiry won’t affect your credit score. It doesn’t guarantee loan approval, and rate estimates can change later in the process. But it’s a useful step before moving forward with a loan application, which will result in a hard credit inquiry that affects your credit score.
Apply to multiple lenders within 14 days
Applying to more than one lender to compare and find the best and lowest-rate auto refinancing can result in multiple hard credit inquiries. But if you apply for more than one car loan within a short window, the credit bureaus typically count them as one inquiry.
VantageScore gives you a rolling 14-day period; FICO gives you 45 days. You may not know which credit-scoring company a lender uses, so submit all auto loan refinancing applications within 14 days. This strategy helps to minimize the overall impact on your credit score.
How long will auto refinancing affect your credit score?
If you manage your credit accounts well and make all payments on time, your score should usually recover after a few months. The hard credit inquiry will stay on your credit report for about two years, but it should stop affecting your credit score in less than a year.
When deciding whether to refinance your car, weigh the pros and cons. You might save money with a lower interest rate, but your credit score may dip for a short time.
