Why Credit Scores Matter
Your credit score is a three-digit number that tells lenders how reliably you repay debts. For auto refinancing, it's one of the most important factors in determining your interest rate.
A higher credit score signals to lenders that you're a low-risk borrower, which translates to lower interest rates. Even a 50-point improvement can save you thousands over the life of your loan.
Credit Score Ranges and Rates
Here's how credit scores typically affect refinancing rates:
- Excellent (750-850): Best rates, 3-5% APR
- Good (700-749): Competitive rates, 5-7% APR
- Fair (650-699): Moderate rates, 7-10% APR
- Poor (580-649): Higher rates, 10-15% APR
- Very Poor (300-579): Very limited options, 15%+ APR
How Refinancing Affects Your Credit
Refinancing does impact your credit, but the effects are usually minimal and temporary:
Hard Inquiry
When you apply for refinancing, lenders run a hard credit inquiry, which can temporarily lower your score by 3-5 points. However, multiple auto loan inquiries within a 14-day window count as a single inquiry.
New Account
Opening a new loan decreases the average age of your credit accounts, which can slightly lower your score. This effect diminishes over time.
Closed Account
Paying off your old loan closes that account, which may affect your credit mix. The impact is usually minor.
On-Time Payments
Making on-time payments on your new loan will improve your credit over time, offsetting any temporary dips.
Improving Your Credit Before Refinancing
If your credit score needs work, try these strategies before applying:
Pay Down Credit Card Balances
Your credit utilization (percentage of available credit you're using) heavily impacts your score. Aim to use less than 30% of your available credit, ideally under 10%.
Make All Payments On Time
Payment history is the most important factor in your credit score. Set up autopay to ensure you never miss a payment.
Dispute Errors
Review your credit report for errors. If you find any, dispute them with the credit bureaus. You can get free reports at AnnualCreditReport.com.
Don't Close Old Accounts
Keep old credit cards open even if you don't use them. They contribute to your credit history length and available credit.
Limit New Credit Applications
Each credit application creates a hard inquiry. Avoid applying for new credit in the months before refinancing.