How Does Refinancing Car Loans Affect a Credit Score?

Refinancing a loan may temporarily affect your credit.

When you refinance a loan, you are closing one loan and opening another. This can cause a temporary drop in your credit score. In a short period, though, you should be able to repair this.

Factors

A number of factors including inquiries into your credit, your outstanding loan balance, and how many loans you have opened determines your Fair Isaac Corporation (FICO) score. When you refinance, all three of these factors will temporarily negatively affect your credit.

Example

You apply to refinance your loan. The lender does a credit inquiry, dropping your FICO sore a few points. Then, the lender approves you and you open a new loan, again dropping your score a few points. Finally, with your new loan, you owe more than 80 percent of the purchase price of your car, dropping your score once more. This last point is important. If you place a larger amount down, it will not affect your score.

Considerations

Even though each of these factors can very briefly lower your score, you will ultimately be able to regain points within a few months of making your new loan payments on time. Each payment you make will help counter the effect of the new loan and credit inquiry, which were only small drops to begin with. As you pay more of your loan, your outstanding balance will decrease, further helping your credit.

References

• FICO: Refinancing
• Bills.com: Refinance and Credit Rating Impact