Does Refinancing Your Car Loan Hurt Your Credit Score?
Everyone’s credit situation is unique, but in general, the short answer is: refinancing your car loan could make your credit score dip slightly at first, but could improve it long-term.
What’s in a Credit Score?
To understand why, it’s helpful to know what goes into your credit score. There are many different score models, and each lender chooses its own – and lenders often use different ones depending on the type of collateral.
Collateral is any property that secures a loan. When you get an auto loan, your car is the collateral.
How Credit Score Models Work
There are certain factors that always matter to your credit, no matter which model the lender uses. Your payment history is one. If you’ve been paying off your debts on time each month, lenders make the assumption that you’ll keep it up. How long you’ve been paying off those debts (“credit age”) also matters: six years of paying bills tells a lender more information than six months.
A smaller factor is how much additional credit you want, measured by “hard” inquiries. When a lender requests your credit report and score from one of the credit bureaus, it’s known as a credit inquiry. Hard inquiries will be noted on your credit report and could decrease your score by a few points. That’s because shopping for too much credit at one time could indicate a problem.
Shopping Around for A Loan is Different (and a Smart Idea)
BUT that same logic doesn’t apply to rate-shopping for one loan. Lenders know that it’s smart to compare offers, so there’s no penalty for multiple hard inquiries for the same type of loan in a short period of time. FICO considers all inquiries related to auto loans within a 45-day period as a single credit inquiry.
Soft Pulls Don’t Affect Your Credit Score
Soft pulls don’t affect your credit. You can always ask your lender or loan aggregator if they’re performing a soft or hard pull. Keep in mind almost every lender will eventually need to do a hard pull before finalizing your loan.
Conclusion: Short-Term Dip, Long-Term Gains
Pulling that together, getting a car refinance online (or offline) could reduce your score a little because your new loan will be newer than your old loan, so the average age of your debt will go down, and the hard inquiry from a lender can make it go down by another few points. Longer-term, though, if your new loan is a better fit for you and you’re able to make your car payments on time each month, the improvement in your credit score will be much greater.
