Yes, refinancing a car can hurt your credit report. Refinancing a car loan necessitates a fresh loan application, which means your credit will be thoroughly checked. Additionally, one inquiry does not remain on your credit record for very long, which is excellent news.
The fact that refinancing shortens the duration of your debts is another factor that might harm your credit. Moreover, the average duration of your credit history is one of the elements that go into determining your credit. Your average credit age may decrease after your present debt is paid off.
Generally, refinancing should have no impact on your FICO score. However, doing a credit check after refinancing is still a smart practice to ensure that it does not have a significant impact on your credit score.
How Does Refinancing a Car Hurt Your Credit
Refinancing a car can simply hurt your credit for several reasons. This is mostly because a lender will have to perform a rigorous investigation to verify your eligibility. It might also appear as a new account on your profile and reduce the average age of existing accounts. In essence, refinancing resets your auto loan. Furthermore, it may make it more difficult to be approved for other forms of credit in the near term.
Hard inquiry
A hard credit inquiry is made each time you apply for a loan. Your credit score can somewhat decline as a result of this. Hard inquiries only affect your score for a maximum of 12 months, but they can stay on your credit record for up to two years. For this reason, your credit score may be hurt by refinancing your car, which requires qualifying for a new loan.
Reduces your account’s average age
Refinancing also reduces the average age of your accounts, which might result in a drop in your credit score. The good news is that, according to the FICO model, account age only accounts for 15% of your credit score. If you handle your new car loan and other debt accounts appropriately, your credit should improve rapidly.
A new account is on your profile
You will usually see a slight decline in your credit score if you are approved for and accept a loan offer. This is because a credit bureau may conclude that you have added to your debt burden and taken on additional debt if they see a new loan on your credit profile. However, there shouldn’t be much of an effect on your credit score because the new loan replaces the old one, especially if they are about equal in size.
How Long Will Refinancing a Car Hurt Credit
Your credit score is impacted by refinancing a vehicle loan, but these effects are just momentary. If you continue to make your payments on time for a few months, your credit score should go back to what it was before you refinanced. It could even rise somewhat in certain circumstances. Within a year, these negative effects on your score will completely disappear if you have any hard questions about your refinancing.
When Should You Refinance a Car
Since refinancing your automobile might have a short-term negative impact on your credit score, you need to first decide if it’s a wise financial decision. If any of the following apply to you, refinancing your auto loan could be a wise move:
Good credit score
A long-term, on-time payment history might improve your credit score. Refinancing might save you money if your credit score has increased considerably since your initial loan.
Strong market value
Refinancing might save you money if the value of your vehicle exceeds the amount of your auto loan. If the value of your automobile is steady, lenders could be more inclined to give you a better interest rate.
The cost of your loan
Your monthly savings from a reduced interest rate might add up, especially if your initial auto loan was excessively costly. If refinancing your vehicle loan keeps more money in your pocket, it can be one of your finest financial choices.
Get a co-signer
Additionally, a co-signer with solid credit and a clean payment record may help you get a better rate. You might save money if a reliable friend or relative agrees to co-sign your auto loan.
Request for funds
You can potentially be eligible for cash-out auto refinancing if your car has positive equity. With this kind of refinancing, your current vehicle loan is replaced, and the remaining amount is paid to you in cash.
How to Reduce the Negative Effect on Your Credit Score
Refinancing will most likely hurt your credit, even if you have good credit. Although it can’t be completely avoided, there are several steps you can take to lessen the effects, such as:
Compare costs
One of the easiest strategies to acquire a good deal is to compare interest rates offered by different lenders. Refinancing a vehicle loan is mostly done to get a better interest rate, which might result in fewer monthly payments. Inquiries of the same kind are usually bundled together by credit bureaus, so compare prices as soon as possible to prevent a big loss.
Review your credit score
It’s always a good idea to check your credit before asking for a loan. Get a credit report from each of the three main credit bureaus—Equifax, Experian, and TransUnion—before you begin looking for refinancing loans. Every customer in the United States is entitled to one free credit report annually from each of the major credit reporting agencies.
Get pre-qualification
Pre-qualifications, also known as pre-approvals, are provided by most lenders. They are letters that indicate how much a lender is willing to give you depending on the loan parameters you select. Before you accept the loan and apply, getting pre-approved reveals how much you can spend and at what interest rate.
Avoid other kinds of loans
Looking for other kinds of loans should be avoided when you’re looking for refinancing loans. If not, there is a chance that you may be the target of several hard credit inquiries, which will further lower your credit score. When you don’t need any other loans, like a mortgage, try to schedule your vehicle refinance for that period.
Final Thought
Refinancing your auto loan offers advantages and disadvantages. Your credit score may suffer briefly, but in the long run, the financial advantages can be far greater than the drawbacks. When you apply for refinancing, there are additional strategies to lessen the effect on your credit score and assist in its recovery.
To minimize surprises, acquaint yourself with the refinancing procedure before determining if it makes sense. To make an informed choice, investigate refinancing lenders, obtain prequalification, and run the numbers.