Does refinancing a car hurt your credit score?

Does refinancing a car hurt your credit score?

Posted on April 29, 2024

When considering refinancing a car loan, one common concern among borrowers is how it might affect their credit score. After all, your credit score is vital in securing favourable terms for future loans. So, does refinancing a car hurt your credit score? Let's explore the factors that influence your credit score when refinancing a car loan.

How Does Refinancing Impact Your Credit?

Refinancing a car loan can indeed affect your credit score. Credit scores consider various factors such as payment history, debt owed, credit history length, and recent credit applications, including those for refinancing.

Here’s a breakdown of how the refinancing process can impact your credit score:

• Generates Hard Inquiries: When you apply for a new loan, it initiates a hard credit inquiry, which can cause a temporary decrease in your credit score. These inquiries stay on your credit report for roughly up to two years but they only impact your score for 12 months. Therefore, refinancing a car loan may lead to a slight dip in your credit score.
• Lowers Accounts' Average Age: Refinancing a car loan reduces the average age of your accounts, potentially contributing to a temporary dip in your credit score. However, the age of your accounts only comprises 15% of your credit score. By responsibly managing your new auto loan and other debts, your credit score should recover quickly.
• Higher Impact as a "New" Loan: If your refinance is reported as a brand new loan, it can have a more significant effect. This triggers a credit inquiry and signals a new "open date" on your profile, indicating a new debt obligation.

How Long Will Your Credit Score Be Affected by Refinancing?

The credit score effects of refinancing are temporary. With consistent payments, your credit score should bounce back within a few months. Any hard inquiry impacts related to refinancing will completely fall off your record within a year.

Tips to Minimize Harm to Your Credit Score

While refinancing a car loan may cause a temporary dip in your credit score, there are steps you can take to minimize the impact. Consider the following tips:

• Get Prequalified: Explore refinancing options from different lenders and get prequalified to view potential offers without affecting your credit score.
• Apply Within a Certain Window: Submit loan applications within a specific timeframe (usually 14 to 45 days) to have them grouped as a single inquiry, minimizing the impact on your credit score.
• Make Timely Payments: Timely auto loan payments significantly influence your credit score. Consistency in payments will aid in the recovery of your credit score.
• Delay Opening Additional Credit Accounts: If possible, hold off on opening new credit accounts after refinancing to improve your credit age and potentially raise your score over time.

Contact Us at Bennett Dunlop Ford

Although refinancing a car loan can lead to a temporary dip in your credit score, the potential financial benefits often outweigh the drawbacks. By understanding the refinancing process, exploring different lenders, and making informed decisions, you can ensure that refinancing aligns with your goals and financial situation. Remember to get prequalified, apply within a specific window, make timely payments, and delay opening additional credit accounts to minimize the impact on your credit score. Contact Bennett Dunlop Ford in Regina to know more.