Will Refinancing My Vehicle Hurt My Credit?

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Bethany Hickey is is a Content Manager and Writer for Auto Credit Express, CarsDirect, and many other automotive blogs. She's a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. 


, Content Manager - July 13, 2021

Any time you take on a new line of credit, you may experience a slight drop in points. Refinancing your vehicle means taking on a new line of credit even though you didn’t get another car. Here’s how it could impact your credit score.

Refinancing Can Hurt a Little Bit

Refinancing your vehicle means paying off its current loan and replacing the loan with another one, usually with the intent of getting a lower monthly payment.

By paying off the original loan on the car, you’re closing one account and opening another. You’re also applying for new credit since refinancing involves applying with a lender that’s going to request your credit reports. That’s three different points of activity: applying for new credit, closing an account, and opening up a new account.

This activity impacts two different aspects of your FICO credit score, which can cause a slight drop in points:

  • New credit 10% – The new credit category keeps track of how many times you apply for a new line of credit. A lender looks at your credit reports, which can cause a drop in points anywhere from five to 20 points, depending on your current credit history and score. The hard inquiry from applying for refinancing can harm your credit score for up to 12 months.
  • Length of credit history 15% – This aspect of the FICO credit score takes into account the length of your credit history, and the average age of all your credit lines; the older the better. By closing one account and opening another, you’re decreasing the average age of all your active credit lines, which can hurt your credit score temporarily until the accounts mature.

You may see a drop in points temporarily after refinancing, but most borrowers see their credit score bounce back quickly if they make timely payments on the refinanced car loan. While refinancing can hurt your credit score a little bit, the temporary drop in points could be seen as a good trade-off for saving money on your auto loan.

Why Do People Refinance Their Vehicles?

Most borrowers refinance to get a lower monthly payment, either by lowering their interest rate or extending the loan term. However, lowering the interest rate is the best way to actually save money, since extending the term means paying more interest charges if the rate stays the same.

Often, bad credit borrowers who originally took on bad credit auto loans look to refinance once their credit score has increased with timely payments on the loan. Since borrowers with less than perfect credit tend to qualify for higher interest rates than good credit borrowers, refinancing and qualifying for a lower interest rate on the same vehicle can mean saving a lot of money on interest charges.

If you’re unhappy with your current interest rate and your credit score has seen improvement since the start of your car loan, and the loan is at least 12 months old, you may qualify for refinancing.

Bad Credit Vehicle Financing

If refinancing isn’t something you’re interested in and you need bad credit lending resources, then look no further than CarsDirect. Thanks to our coast-to-coast network of special finance dealerships, we connect bad credit borrowers to dealers that can assist with credit challenges.

To see if there's a special finance dealership near you, fill out our free auto loan request form.

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, Content Manager

Bethany Hickey is is a Content Manager and Writer for Auto Credit Express, CarsDirect, and many other automotive blogs. She's a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. 


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