Refinancing a car may lower your credit score temporarily. However, it isn’t a high price to pay for the amount of money you end up saving, of course, if the deal is right.
How Does It Hurt Your Credit?
Like any other type of refinancing, auto refinancing can also affect your score, typically because of the credit checks. Lenders often run hard inquiries on your credit report to deem you fit or unfit for the loan. This may cause a minor reduction in your score. However, once you qualify for and get an offer, you may also witness another small dip in the score.
The reasons behind both dips are similar. Typically, borrowers who apply for and deal with new debt are more likely to miss their bill payments. However, getting your score back on track is also an easy process. All it requires is a few good months of uninterrupted payments.
What Should You Keep in Mind?
Here are the two most important considerations to keep in mind:
- While shopping for a loan, multiple hard inquiries may not do as much harm to your credit score as a single inquiry might. Hence, you may want to make sure that you’re applying with at least three lenders at a time.
- Taking on a brand new debt may cause a temporary dip in your score, but since refinancing replaces your existing loan with another loan of the same amount, the impact remains minimal.
Once you do accept a new refinancing deal, the new loan will show up on your credit report, and the track will be kept on your payments toward it. On the other hand, your original loan will remain on the report and be marked “closed in good standing” for almost ten years.
Does Auto Refinancing Cause Serious Damage to Your Score?
In a nutshell, no, it doesn’t severely hinder your ability to ever apply for a new loan or a credit card, for instance. A bad credit score isn’t something that develops due to a certain number of hard inquiries on your report. It develops because of a long history of lack of on-time payments and various other factors.
If you do end up with a bad score, you will have a hard time refinancing your auto loan. While it won’t be impossible to find a lender, the consequent terms and interest rate will not be worth your while.
You may either qualify for a high-interest rate or a longer repayment period. Both circumstances will be detrimental to your financial standing.
In conclusion, refinancing a car does not leave a permanent mark on your credit history. However, it’s strongly recommended you refinance your vehicle only once your credit score has improved significantly.
Otherwise, a low score may not be able to deal with the blow that comes with a hard inquiry. Furthermore, make sure not to be laid back with on-time payments with your original as well as refinanced loan.