You may have heard about the option to refinance your auto loan. Refinancing can be a good idea that can save you money, but what does it do to your credit score?

How Refinancing Can Affect Credit

car keys, refinanceIn reality, refinancing a car loan won’t hurt your credit. It will, however, change it just a little. Even though refinancing isn’t a big threat to your credit score, you can still minimize its effects with careful planning.

When you do apply to refinance, you're essentially taking out a new auto loan and closing the old one, with the new lender checking your credit report to see if you qualify. When a lender pulls your report, this is considered a hard inquiry, which will likely lower your credit score by a few points.

If you’re looking for the best rate, you should check with multiple lenders, but each time a lender pulls your credit, it’s another hard inquiry recorded. However, the credit bureaus recognize a practice called "rate shopping" that doesn't result in an inquiry every time you apply for the same type of credit.

Rate shopping happens when you submit multiple auto loan applications over a short period of time – usually within a 30- or 45-day period. When this is the case, it'll only count against your credit as one hard inquiry no matter how many lenders you apply with, so your credit score will be minimally affected. The important thing to remember is that all those inquiries must happen during the short period of time.

How Long Will Your Credit Be Affected?

The good news is that hard inquiries don’t last long. Yes, your score will typically drop by a few points, but over time, the impact of a single one will decrease. Any major effect will usually last two to three months, while all hard inquiries are removed from your credit report after 24 months.

Bottom Line

Generally, refinancing won’t hurt your credit significantly, but you need to make sure you rate shop before taking action so you can find the lowest interest rate.

If you're seeking a car loan instead, Auto Credit Express can get you connected to a local dealership that can help even if you're dealing with less than perfect credit. We work with an extensive network of special finance dealers who can work with people who have bad credit, no credit, or even bankruptcy. Get started today by filling out our no-obligation, free online auto loan request form.