Will refinancing my car hurt my credit score?

Do you know what your credit score is? It’s worth finding out because it may determine your ability to get a new car loan in the future, or whether or not you can refinance your current auto loan. Your credit score is one of the most important factors when looking to take out a loan or refinance an existing loan, and it can affect everything from the loan's interest rate down to the lender you work with. Let's cover what credit scores are and the basics of what happens to your credit report during a loan refinance.

What is a credit score?

Your credit score is a number between 300-850 that indicates how likely you’re able to pay off your debts over time. These scores are a widely used indicator which credit unions and banks use to measure whether someone will be able to pay back loans. The credit score is an important part of the lending process because it allows lenders to determine whether or not they should provide you with a loan. This means that many lenders will only consider you for loans if your score is high enough to meet their requirements.

The type of lender you’re able to work with also depends on your level of credit and what your credit history looks like. For example, some lenders will offer loans more readily to people who have a good credit history and stable income, while they are often unwilling to give a loan to someone with a bad credit history or low income. According to Experian, scores between 700 to 850 are usually considered “good”. Scores of 650 or higher are normally suitable for auto loan refinancing through most lenders.

If you’re looking to take out a car loan, it’s important that you check your credit beforehand. Make sure it’s up-to-date and try to raise your credit score if possible so that lenders can see how reliable you are when it comes to paying back your debt in the future. Different components in your credit report impact your credit score, things like your existing debt, outstanding loans, other personal liabilities, and length of credit history.

How is your credit score calculated?

Credit scores are calculated from a variety of factors such as credit history, loan payments made on time, and the amount of debt you currently have. Having a lower number means you have a higher risk to lenders. It can lead to being charged a higher interest rate when borrowing money or keep you from refinancing entirely with denied loan applications. The higher your number is, the lower your lending risk. Higher scores mean you will qualify for loans more often or get a better interest rate. To better understand the score, we can look at the report definition from our terms glossary.

The credit report definition

Credit reports include your history over several years. The definition of a credit report is:

• A credit report is a record of your credit history which normally spans 7 to 10 years. This report shows information related to bank accounts, loans, bankruptcies, and personal liabilities. The information in a credit report is used to calculate a borrower’s credit score, which helps determine whether or not someone will be able to meet financial obligations.

How car loan refinancing affects your credit score

New car loans are lines of credit. Therefore, like any standard loan, finalizing a new loan does negatively impact your credit. This is because of the credit pulls and inquiries performed during the approval stages. A credit pull is an inquiry into your credit report and history that checks your credit score. Credit pulls can only be performed by an authorized party with your approval so they can access your loan balance information and payment history. There are two different types of credit pulls including hard and soft, but only hard inquiries will slightly reduce your credit score for a short period.

What does impact your credit?

• Hard credit pulls check your suitability for a loan and can impact your credit since you’re applying for new credit. This type of pull occurs prior to issuing a new line of credit where you have already selected a rate with a lender and are applying for approval. A hard pull can drop your credit score a few points when refinancing a car loan.

What does not impact your credit?

• Soft credit pulls check your credit history along with other factors like how many times they have borrowed money. Unlike a hard credit pull, a soft credit pull does not affect credit scores. Soft pulls are used early on in the loan process to determine things like your finance suitability.

Should you refinance your new car?

If you’re thinking about refinancing your auto loan, one of the first things to consider is what you’re trying to gain from the process. Refinancing replaces an existing loan with a new one, giving you the opportunity to get one that works better for you. The benefits of refinancing can include getting a new loan at a lower rate, having a cheaper monthly car payment, shortening the loan term, finding a lower interest rate, and/or refunding dealership extended warranties and prepaid maintenance plans attached to your original loan. We cover these goals in detail in our Understanding Auto Refinance guide and talk about the life of the loan. The small, temporary drop in your credit could be worth the added benefits.

Tying to all together

In summary, it's possible that refinancing your car loan could negatively affect your credit score. However, a slight, temporary dip in your credit score can be worth it depending on the type of loan, amount, and length of time you currently have. Consider your options before signing a loan agreement and make the right choice for your financial goals and credit in the long run.

Credit score impact FAQs

• Should you refinance your new car? Refinancing can be a good option to pursue depending on what you’re trying to gain from the process. The benefits of refinancing can include getting a new loan at a lower rate, having a cheaper monthly car payment, shortening the loan term, finding a lower interest rate, and/or refunding dealership extended warranties and prepaid maintenance plans attached to your original loan.

• Will refinancing my car hurt my credit score? Yes, refinancing your car often impacts your credit score. The hard pull which is part of the loan finalization process can drop your credit score a few points for a short period.

• What is a credit score? Your credit score is a number between 300-850 that indicates how likely you’re able to pay off your debts over time.

• What credit score do I need to refinance? Scores of 650 or higher are normally suitable for auto loan refinancing through most lenders.

• How is your credit score calculated? Credit scores are calculated from a variety of factors such as credit history, loan payments made on time, and the amount of debt you currently have.

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What are variable versus fixed interest rates?

About the auto refinance process and application steps

Use the auto refinance calculator to estimate your savings