According to a recent study, nearly 65% of Americans are living paycheck to paycheck due to factors like inflation. If money is tight, it’s possible that refinancing your car loan could help improve your monthly cash flow. Although auto loan rates have risen since the Fed started hiking interest rates, refinancing could still save you money.
If your credit score has improved significantly since you took out your auto loan, you may be able to secure a better interest rate, especially if you shop around and compare lenders. Even if you can’t get a lower rate, you might be able to extend the term of your auto loan to lower your monthly payments and give yourself more financial breathing room.
But before you start shopping around for a new loan, you may be wondering, does refinancing a car hurt your credit? Here’s what you need to know.
Does Refinancing a Car Hurt Your Credit?
Refinancing a car involves taking out a new loan to pay off and replace your old one. You may do this to get a lower interest rate or extend the loan to lower your monthly payments. Since you have to apply for a new auto loan during the refinancing process, your credit may be affected.
Hard Inquiries
To determine your eligibility for an auto loan, the lender you’re working with will have to check your credit, which results in a hard inquiry on your credit report. A hard inquiry can cause a slight drop in your credit score of around five points or less.
However, your credit score should bounce back quickly as long as you keep practicing good financial habits like making payments on time. A hard inquiry will usually affect your credit score for a year or less, and will only show up on your credit report for a maximum of two years.
Comparison Shopping
Does refinancing a car hurt your credit more if you shop around and compare lenders? In order to give you an accurate interest rate quote, lenders may have to check your FICO score and perform a hard pull on your credit. Luckily consumers are given a grace period to comparison shop, which allows them to apply for several auto loans without damaging their credit excessively.
As long as you get all the rate quotes you need within a period of two weeks, the credit checks are typically grouped together as a single hard inquiry (meaning your credit score should only drop by five points or less).
However, if you don’t get all your rate shopping done within the grace period, you could start racking up multiple hard inquiries. So make sure you comparison shop in a timely manner!
Average Age of Accounts
Paying off your old auto loan and taking out a new one can also lower the average age of your accounts. The average age of your credit accounts makes up 15% of your credit score. So you may notice another slight decrease in your FICO score once your car refinance is complete.
However, payment history is the biggest factor that affects your credit. So if you make all the payments on the new loan on time, your score will bounce back. You should also hold off on applying for new credit for a while after refinancing. This prevents the average age of your accounts from dropping further and gives your credit a chance to recover.
The Final Verdict: Does Refinancing a Car Hurt Your Credit?
Although refinancing a car can decrease your credit score slightly in the short-term, it may be good for your credit in the long run. Payment history is the biggest factor that affects your credit score. So if refinancing your car lowers your transportation costs and helps you pay your loan on time every month, it could be a good financial move.
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Image and article originally from www.savingadvice.com. Read the original article here.