Refinancing a car can save you money on interest or give you a lower payment and some breathing room in your budget.
Auto refinancing could also temporarily ding your credit score, but it’s unlikely to hurt your credit in the long run.
Regardless of your reason for wanting to refinance a car loan, it’s important to minimize any potential damage to your credit score.
Why refinancing can lower your credit score
When you apply for credit, the lender wants some assurance you’re likely to pay as agreed. With your permission, the lender typically checks your credit.
When you apply to refinance your car, a hard inquiry will be noted on your credit, causing a temporary dip in your score. The effect of a hard inquiry typically disappears in six months.
Car loan inquiries are typically bundled as a single inquiry if they’re done in a compact time frame.
Car loan inquiries typically are bundled as a single inquiry if they’re done in a compact time frame. For that reason, it’s smart to do your loan shopping relatively quickly. VantageScore gives you a rolling 14-day period; FICO gives you 45 days.
But that’s a relatively small factor. Consistently paying on time is far more important.
How to minimize impact on your credit
Find out where you stand. Checking your credit does not hurt your score and gives you an idea of how lenders will size you up. The scores used for car loans are unlikely to be precisely the ones you see online or on credit card statements: Auto-specific scores typically give more weight to how you’ve made car payments in the past and are often on a scale of 250 to 900, rather than the 300 to 850 of most other FICO scores. (You can check and monitor your free credit score on NerdWallet.)
If there’s a mortgage application in your future in the next six months to a year, it’s best to avoid applying for any other credit.
Avoid shopping for other types of credit. If there’s a mortgage application in your future in the next six months to a year, it’s best to avoid applying for any other credit. That’s the time to check your credit report closely, making sure there are no errors that could keep your credit application from being approved at the best rate you can qualify for. If there are errors, you still have time to dispute them.