Will Refinancing a Car Loan Lower a Credit Score?
All credit situations are different and the short answer is: by refinancing an auto loan trying to get a lower payment or interest rate will impact your credit score and possibly lower it at first. However, if you reduce the amount you pay every month or the interest rate and total you owe for the car, then you may see an increase a little bit down the road.
What’s in a Credit Score?
A lot of factors go into a persons credit score. Many different score models exist today and even a few that take into account your job history and education, and each lender chooses its own – and lenders often use different ones depending on the vehicle being refinanced.
Credit Score Factors
Payment history is a big factor in most credit score models. If you have been paying every month on your accounts then lenders considering you for a loan are much more likely to approve you. Certain factors will always change your credit, no matter which model is used by the lender. The time you’ve been paying off those debts is known as the credit age and also matters: if you’ve been paying on bill for years then you have a solid track record.
Another factor which may hurt your credit score is a “Hard Inquiry“. When a sign up for a new card or an Amazon account or even a store credit card, the business will run a credit check. This means they will request 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. Many lenders do what is known as a “Soft Credit Check” before they make any offer. All offers do depend on an actual credit check but there really is no need for it until a new loan is found that matches your goals. Soft pulls don’t affect your credit. You should always ask your lender or loan aggregator if they’re performing a soft or hard pull.
Comparing Loans is an exception (a Good Idea)
If you are applying for a car loan refinance with multiple lenders at the same time the credit bureaus dont penalize you for each inquiry to your credit file. Instead they consider it just one instance. While it will still have the same negative affect as a single inquiry it won’t be multiplied just because your are smart enough to compare deals. FICO considers all inquiries related to auto loans within a 45-day period as a single credit inquiry.
Tldr: just a short term hit might make a big positive future
Taking advantage of a car refinance online could reduce your score slightly because your new loan will be brand new, so the average age of your debt will be reduced, and the hard inquiry might 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.