A couple consulting with woman about an auto refinance

Will Refinancing My Car Help Or Hurt My Credit Score?

Your credit score can impact many factors of your life. Everything from insurance and interest rates to how much you can borrow for a mortgage relies in some respect on your credit score. A great credit score can open many doors, but the opposite also holds true. 

Our life circumstances are constantly changing and sometimes it makes sense to think about refinancing your car or house. But if you’ve worked hard to improve your credit history in recent years, keep in mind that certain financial activities could hurt your credit score. 

Below we will be discussing whether refinancing your car can help or hurt your credit score. Read on to find out if refinancing your car makes sense for you. 

How Refinancing a Vehicle Affects Your Credit Score

Just as when you got your original loan, refinancing your car may mean a slight dip in you credit score — but only temporarily. 

This change in credit score is because lenders will always ask for a credit check, as calculated by the FICO Score or VantageScore, before they give you the loan. When a financial institution checks your credit, it can ding your credit score by a few points. 

And although your credit score may temporarily drop, there is good news. If you shop around multiple lenders in the space of a few weeks, your credit score will likely drop only once as it is considered a single event. VantageScore allows you a rolling 14-day period to loan shop while FICO gives you 45 days.

If your goal is to refinance your vehicle to save money each month, once your loan is approved and you’ve made your first few payments, your credit score should go back up to its former level – and you’ll have more money in your wallet. 

What Types of Financing Affects Your Credit Score

Besides auto refinancing, financing that could impact your credit score includes:

    • A home loan or mortgage. A house is likely the biggest purchase you’ll make in your life and lenders want to be sure you’ll be able to make payments for many years to come.
  • A personal loan. If the loan is unsecured, lenders may be more cautious. If you’re offering your savings or a certificate deposit as collateral, it may be easier to get approved. 
  • A line of credit or revolving credit. This means you only borrow what you need when you need it, and therefore represents slightly less risk for the lender.
  • Credit cards. If you’re offered a free card, that issuer has likely run only a “soft check” on your credit history, which shouldn’t affect your credit score. If you apply for a new card, the issuer will likely run a “hard check” that will temporarily lower your score.
  • Student loans. Whether you borrow from the government, a bank, credit union, or another provider, you’ll need to make timely payments to maintain a good credit score. 

The best way to maintain a good credit score is to make sure all of your payments are timely.

What Financial Activity Doesn’t Affect Your Credit Score

Activities that won’t impact your credit score include:

    • Debit card usage. Credit scores are generally only concerned with credit accounts and debt, not your savings and checking accounts. 
  • Checks and cash usage. Because this is money you have, not money you’re borrowing, it won’t affect your score. 
  • Receiving welfare. Getting assistance from state or federal governments is not usually considered a loan (except for student loans) so it doesn’t form part of your credit history.
  • Installment and layaway purchase plans. Because you don’t get the item until you’ve fully paid for it, it’s not considered a credit purchase so it won’t affect your score. 
  • Rent and utilities. Paying on time won’t improve your score. But multiple missed payments may hurt it — if a company sends your bill to collections.
  • Federal taxes. A small delay in payments won’t hurt your score. But if you’re very late, the IRS may report you and that is likely to harm your score

Checking your credit score won’t have a negative impact as that is considered to be a “soft check” only. You’re entitled to know your credit score before you make financial decisions. 

What’s the Difference Between Hard and Soft Credit Checks?

As mentioned earlier, there are hard and soft credit checks. It’s important to understand the difference before you begin a refinancing application.

Hard credit inquiry or hard pull

When you apply to borrow money, the lender will run a credit check on you. They will gather all possible financial information to determine if you will be a reliable borrower or customer. 

Information will include how much debt you currently hold, how long you’ve held it, and how well you’ve been paying it back. This kind of hard check will hurt your credit score, at least temporarily. 

After you’ve made your first payments on time, your score should recover — and even start to rise.

Soft credit inquiry or soft pull

This is when your employer, your bank, or other interested parties look into your credit as part of a more general background check. It’s also considered a soft check when you request your credit score. A soft check won’t impact your credit score. 

Will Refinancing My Car Help or Hurt My Credit Score? And Is It Worth It?

The simple answer is that refinancing your car will affect your credit score, but only temporarily. This is because a lender will run a hard check on your credit. If everything is done right, and payments are made on time, your credit score should recover in approximately six months, and making payments on time can help your credit score. 

Determining whether refinancing your car is worth it depends on your situation. If you have good credit, refinancing at a lower rate may be an option for you. If not, you may want to spend time building your credit before making any changes.

Still, have questions about refinancing your car and how it impacts your credit score? Step one is learning more about auto refinancing before choosing to go ahead with getting a new loan. Get started with TEG Federal Credit Union today.

[Learn More About Auto Refinancing]