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What Happens to Your Credit When You Refinance a Car?

Finance | 11/29/2022 21:05
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Car loan refinancing can help you save a lot of money. By refinancing your existing loan you can get a lower car loan APR and change your repayment period. But when you choose to refinance, will it affect your credit score? 

Here’s what happens to your credit score when you refinance a car.

Credit score calculation

How are credit scores calculated?

Credit scores are three digit numbers that are designed to tell lenders how likely you are to repay your debts. They indicate how financially stable you are. FICO credit scores are the most popularly cited scores, but FICO is merely a type of credit score model (FICO stands for Fair Isaac Corporation, the company that helped pioneer credit scoring). Most agencies use either a FICO model or a variation of it for credit score calculations.

Credit scores take a look at five major categories in your finances. Each category is weighed differently, but each part is important to ensuring that your score is as healthy as possible. Credit scores are calculated by looking at monthly reports that are sent to the three major credit bureaus (Equifax, Experian and TransUnion). Many different organizations send reports to the bureaus, including:

  • Mortgage lenders

  • Auto loan lenders

  • Credit card companies

  • Personal loan lenders 

  • Medical billing collection agencies

Utility companies typically do not send reports, but missing utility payments can result in reports to a collections agency (which will be reported). The credit bureaus take all of these reports and break the information down into the following categories. 

Your Payment History (35%)

Your payment history is the most important factor in your credit score, accounting for 35% of your total score. Do you pay your accounts on time and in full, or do you miss payments? If you have had a missed or late payment, its affect on your score will depend on:

  • The amount you’ve missed

  • How recently you’ve missed a payment

  • How frequently you’ve missed payments

Ensuring that you make consistent, full, and on time payments will have the greatest positive effect on your credit score.

Your Amounts Owed (30%)

This is the second most important category for your credit score, accounting for 30% of your credit score. The amounts owed category looks at how much money you owe, how much money you have available to you, and the number and types of accounts you have. The most important factor in this is your credit utilization ratio, which is a ratio of how much money you owe compared to how much money you have available to you. This looks at individual accounts as well as your total debt and total line of credit. Your ratio should be less than 30% for each account as well as your overall amounts owed.

Your Length of Credit History (15%)

The length of your credit history makes up 15% of your credit score. This category looks at how long your accounts have been open and active. How long have you had your accounts open and how long has it been since you’ve used certain accounts? The longer you have a history of having open accounts, consistently using them, and consistently paying them, the higher your score will be.

Your Credit Mix (10%)

Your credit mix accounts for 10% of your credit score. Your credit mix looks at how diverse your credit accounts are. Lenders like to see that you can manage payments for a number of different accounts. Healthy mixes typically include installment loans, mortgages, car loans, credit cards and retail credit cards. The better the mix, the better your score will be.

New Credit (10%)

Your new credit counts for 10% of your credit score. This category looks at how many new accounts you have. If you have new accounts that you haven’t proven that you can consistently pay, it will count against you. New accounts are like unanswered questions to credit bureaus.

Credit score factors

Does refinancing a car hurt your credit?

When you refinance a car it will affect two categories in your credit score: your length of credit history and your new credit. Because it will be a new loan, it will shorten your length of credit history, which can cause a minor dip in your score. It will also be a new credit on your account, so your score will lower because it's new. 

Refinancing your car means that you will also have hard inquiries on your account. Hard inquiries will also cause a dip in your score, typically between five and ten points. It is temporary however, and they usually wear off in about six months. 

So, does refinancing a car loan hurt your credit? The answer is yes and no. While it will affect these parts of your score, it can also help your credit score greatly by saving you money and making your payments more manageable.

Refinancing saves you money so you can pay off more debt

If you are able to refinance your car loan to a lower car loan APR, you can save a lot of money over the course of your loan. And those savings can be used to pay down other debts you have. These payments can lower your credit utilization ratio, which can significantly improve your credit score.

Refinancing can help you make more consistent payments

If you are having trouble keeping up on your monthly payments, refinancing can help you by lengthening your repayment plan. When you lengthen your repayment plan you have more time to pay off your loan, which significantly lowers your payments. If you can stay more consistent on your payments you will increase your score a good deal.

Customer with a good credit score

What is a good credit score to refinance a car?

Credit scores are broken down into five categories: 

  • Exceptional (Super Prime): 800-850

  • Very good (Prime): 740-799

  • Good (Near Prime): 670-739

  • Fair (Subprime): 580-669

  • Very poor (Deep Subprime): 300-579

The better your credit score is, the better car loan APR you will be offered. The best car loan refinance rates are offered to those with very good and exceptional credit scores. But that doesn’t mean that you will be unable to refinance if your score isn’t quite that high.

If your credit score is better than it was when you originally financed and/or the market rates are better than when you initially financed, there’s a good chance you will be able to qualify for a better car loan APR.

That being said, it’s best to work on your score to get it in the best shape possible before you start the refinancing process. 

Work on making consistent, on time payments

If you have a habit of making late payments, try to fix this as soon as possible. Sign up for autopay on your bills if possible to ensure you don’t miss a bill and look for ways to keep up on full payments. Are there areas of your budget where you can make sacrifices to save a bit of money? Canceling unused or unnecessary subscriptions and switching to generic brands are just a few ways you can free up some extra money and ensure you are making full payments on all of your accounts.

Request higher credit limits

Contact your credit card companies and ask for higher credit limits. This will automatically give a boost to your credit score by reducing your credit utilization ratio.

Avoid opening new lines of credit

Any new accounts that you open at this time will adversely affect your credit score, so try to resist opening anything new until after you refinance your car loan.

Ask to be an authorized user on a loved one’s account

If you have a friend or family member with a great credit score, becoming an authorized user on one of their accounts can give your credit score a boost. Their on time payments and low credit utilization ratio can help to give yours a boost.

Request a copy of your credit report

It’s a good idea to request a copy of your credit report at least once per year to ensure that there aren’t any mistakes or errors. A missed payment marked in error can have a significant effect on your score, so it’s good to regularly review your report and make sure everything is accurate.

When you decide to refinance your car, be sure to apply to all lenders in the same two week time frame. Credit bureaus know that people need to apply to different places in order to compare, so they give a two week window where all hard inquiries will count as one inquiry (and therefore only affect your credit score once.

Credit loan fees

Refinancing a car loan can cause a slight dip in your credit score, but it can also help your score in the long run.

Refinancing your car loan is super easy when you use a company that specializes in car loan refinance, like Auto Approve. So what are you waiting for? Get in touch with Auto Approve today to see how much money you could be saving!


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*APR and Fees Disclosure: Auto Approve works to find you the best Annual Percentage Rate (APR), which is based on factors like your credit history, vehicle and desired payment terms. Fees to complete your loan refinance vary by state and lender; they generally include admin fees, doc fees, DMV and title. Advertised 6.24% APR based on: 2019 model year or newer vehicle, 730 minimum FICO credit score, and loan term up to 72 months. All loans subject to credit and lender approval.
Auto Approve has an A+ rating with the BBB and is located at 2860 Vicksburg Lane North Plymouth, MN 55447. Auto Approve works to find its customers the best terms and APR, which are based on factors like credit history, vehicle, and desired payment terms. Loan amounts, costs, and fees vary by state and lender; they generally include admin fees, doc fees, DMV, and title fees, depending on the lender and period of repayment. There is no fee to obtain a quote and all refinancing-related costs are included in the amount financed so there are no out-of-pocket costs! For more information, please go to AutoApprove.com.