How Does Refinancing a Car Affect Your Credit?

Refinancing a car loan involves securing a new loan to pay off an existing one, often with the goal of obtaining a lower interest rate, a reduced monthly payment, or a different loan term. This financial maneuver can influence your credit profile. Understanding these impacts is important for those considering refinancing. While there might be some temporary adjustments to your credit score, the long-term benefits of a more manageable loan can often outweigh these initial changes.

Immediate Credit Report Changes

When you apply to refinance a car, lenders perform a “hard inquiry” on your credit report to assess your creditworthiness. This hard inquiry indicates to other lenders that you are seeking new credit. A single hard inquiry can cause a small, temporary dip in your credit score, often by just a few points. However, this impact is short-lived, with the score recovering within a few months.

Credit scoring models, such as FICO and VantageScore, recognize that consumers often shop around for the best loan terms. For auto loans, multiple hard inquiries made within a specific timeframe are treated as a single inquiry for scoring purposes. This “rate shopping” window can vary by model, typically ranging from 14 to 45 days. Submitting all your refinancing applications within this period can help minimize the overall impact on your score.

Loan Account Adjustments

Refinancing a car loan means a new loan account is opened, and your original auto loan is paid off. The original loan is reported on your credit file as “closed/paid.” While this closed account remains on your credit report, it will no longer contribute to the average age of your open accounts.

The length of your credit history and the average age of your accounts are factors in credit scoring, so opening a new, younger account might slightly lower the average age. However, a well-managed closed account with a positive payment history can continue to benefit your credit report for many years, often up to ten years. The impact on your credit mix, which considers different types of credit, is minimal since one auto loan is replaced by another.

Payment Behavior and Credit Score

Your payment history is the most influential factor in credit scoring, accounting for approximately 35% of your FICO score. Consistently making on-time payments on your new refinanced car loan is important for maintaining and improving your credit score. Each timely payment demonstrates responsible credit management to lenders.

Refinancing can lead to a lower monthly payment, which can make the loan more affordable. This increased affordability can indirectly benefit your credit score by reducing the likelihood of missed or late payments. Reduced financial strain can also free up funds, potentially allowing you to pay down other debts and improve your overall debt utilization. Conversely, any late or missed payments on the new loan will significantly harm your credit score. A single payment reported 30 days or more past its due date can have a substantial negative effect, and this negative mark can remain on your report for up to seven years. Therefore, ensuring timely payments on the refinanced loan is important for positive credit development.

Monitoring Your Credit

After refinancing your car, regularly review your credit reports to ensure accuracy. You can obtain a free copy of your credit report annually from each of the three major credit bureaus through AnnualCreditReport.com. This allows you to confirm that your original loan has been reported as closed and the new loan appears correctly.

Monitoring your credit score is a good practice, as minor fluctuations are normal. If you identify any inaccuracies or discrepancies on your credit report, such as incorrect account statuses or payment histories, it is important to dispute them promptly with the respective credit bureau. Ensuring the information on your report is correct helps maintain the integrity of your credit profile.