How Does Refinancing a Car Affect Your Credit?

How Credit Lines Work

Refinancing a car loan essentially adds and subtracts a new trade line from your credit report. Each time a loan is refinanced, one lender is paid in full and one claims a new lien on the car. Each credit line on your credit report is updated monthly to give the ratings agencies an idea as to how you are managing your debt load. One way refinancing a car can adversely affect your credit is if the lender does not fully pay off the previous account and then the old car loan drifts into default without your knowledge.

New Accounts

New accounts theoretically should not adversely affect your credit. However, if you are desperately seeking a new loan and applying to many different lenders, the amount of inquiries reported (the action required of a lender to view your report) will begin to lower your score. Rating agencies see excessive inquiries as an attempt to secure credit without legitimate collateral, and will subsequently lower your score.

Refinancing

Defaulting on any loan will adversely affect your credit. Keep your accounts current and paid, and there will be no negative effects. However, if a car loan is refinanced a number of times in a short period of time, the credit agencies may lower your score as you are adding too many trade lines within a specified period of time. The rating agencies will not reveal all of their scoring parameters, but a good rule of thumb is to keep an account open and current for as long as you are able.