Key retirement financial advisor takeaways

  • Refinancing may lower your credit score a few points, but the impact to your credit score will only be temporary.
  • Applying for a loan generates a hard inquiry.
  • Refinancing may be worth it if rates have dropped since you took out your loan.

Refinancing a car loan could get you better loan terms and free up funds in your budget. But does refinancing a car hurt your credit score?

You’ll likely see a small drop in your credit score when refinancing. But don’t steer clear of refinancing your auto loan just because of a temporarily lowered score. It could be a sound decision that results in cost savings or much-needed financial relief.

How does refinancing affect your credit?

Does refinancing affect credit? Refinancing a car loan can impact your credit profile. It can affect your FICO credit score, which comes from the Fair Isaac Corporation. FICO scores are based on how you manage your credit, including your payment history, how much debt you owe, the length of your credit history, and even any recent credit applications — such as applications to refinance your car loan.

Some lenders may also use the Vantage Score model. While Vantage credit scores are calculated slightly differently, refinancing will cause a similar dip.

These credit scoring models may lower your score a few points when you apply for new credit and a hard inquiry is placed on your credit report. In addition, a new account on your credit profile decreases the average age of your credit accounts, which also impacts your overall FICO score. Here is a deeper look at how refinancing a car loan impacts your credit:

  • It generates hard inquiries: Each time you apply for a loan, a hard credit inquiry is generated, which could result in a slight dip in your credit score. Hard inquiries remain on your credit report for up to two years but only impact your score for up to 12 months. Consequently, refinancing a car loan — which involves applying for a new loan — could temporarily ding your credit score.
  • It lowers your accounts’ average age: Refinancing also lowers your average age of accounts, leading to a possible decrease in your credit score. The good news is account age only counts for 15 percent of your credit score under the FICO model. Your score should bounce back quickly if you responsibly manage your new auto loan and other debt accounts.
  • It has more impact if reported as a new loan: If your loan refinance is reported as a “new” loan, it will more significantly impact your credit profile. The refinance will not only generate a credit inquiry but also have the added impact of creating a new “open date” on your profile. When a new open date shows up, it tells the credit agencies you have taken on a new debt obligation, increasing your overall debt load.

How long will my credit score be affected by refinancing?

Even though refinancing a car loan impacts your credit score, these effects are only temporary. Within a few months of uninterrupted payments, your credit score should return to where it was before you refinanced. In some cases, it may even increase slightly. If you have any hard inquiries related to your refinancing, these score impacts will fall off entirely within a year.

Bankrate tip
Use Bankrate’s refinance calculator to determine whether it is the right time to finance.

How to limit harm to your credit score

Although your credit score may drop when you refinance, there are ways to minimize the impact.

  • Get prequalified: Shop around to find the best deal on refinancing. Once you have a shortlist of preferred lenders, get prequalified to view potential financing offers without affecting your credit score.
  • Apply within a certain window: If you submit loan applications within a 14-day timeframe, most credit scoring models will group them into a single inquiry. Depending on the credit scoring model, this window could go up to 45 days. This is called rate shopping and can also minimize the impact on your credit score.
  • Make timely auto loan payments: The most significant component of your credit score is your payment history. It accounts for 35 percent under the FICO model, so paying your loan on time each month will help your credit score bounce back.
  • Wait to open additional credit accounts: Your credit age will decrease when you refinance. Holding off on opening new credit accounts after refinancing will help improve this number and possibly raise your credit score over time.
  • Consider Experian Boost: This optional program means you can help boost your credit score by including payments on day-to-day bills like streaming services, rent and utilities. Experian Boost participants have a reported 13 points added to their FICO 8 credit score.

The bottom line

Benefits and drawbacks accompany the choice to refinance your car loan. Although it can temporarily hurt your credit score, the financial benefits may significantly outweigh the damage. There are also ways to minimize the impact on your credit score and help it rebound when you apply for refinancing.

Before deciding if refinancing makes sense, familiarize yourself with the process to avoid surprises. Also, explore refinancing lenders, get prequalified and run the numbers to make an informed decision.