Can Refinancing a Car Hurt Your Credit Score?
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What Is Auto Loan Refinancing?
Can Refinancing a Car Lower Your Credit Score?
Factors That May Affect Your Credit Score
Your payment history: This is the most important factor, accounting for 35% of your FICO score. Lenders want to know that you have a track record of paying your bills on time. This helps them determine how risky offering a loan may be. The amount you owe: As the second biggest factor, this comprises 30% of your credit score. If you’re using a high portion of your available credit, lenders may see you as potentially overextended, putting you at higher risk of default. Length of credit history: This factor makes up 15% of your FICO score. FICO looks at how long you’ve had your credit accounts, as well as the last time you used them. In general, the longer your credit history, the better the effect on your score. Your credit mix: Generally speaking, FICO likes to see you have a mix of credit, such as credit cards, installment loans, and mortgages. This accounts for 10% of your credit score calculation. New credit: This factor also makes up 10% of your score. New credit, as mentioned above, can be a red flag to lenders who might worry it puts borrowers at greater risk of default.
Can Refinancing a Car Help Your Credit?
When You May Not Want to Refinance an Auto Loan
If interest rates have risen since you took out your initial loan: In this scenario, it may be very difficult to find a new loan with a better rate. This may be true even if your credit score has improved. If your car is worth less than the amount you still owe: If you’re in this situation, your loan is what’s known as “under water.” Lenders may be hesitant to extend credit since if you default on your loan, they’ll be unable to recoup their losses by repossessing and selling your vehicle. If you’ve already paid off most of your loan: In this case, refinancing may not make much sense, as the cost of fees can offset the potential savings. If you’re planning to apply for another major loan soon: Remember that new credit will depress your credit score. So think ahead to whether or not you’ll be applying for another major loan in the near future, such as a mortgage. If so, you may want to put off refinancing until you’ve secured that loan at the best rate possible.
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