How Can Refinancing an Auto Loan Impact My FICO® Scores?

The decision to refinance an auto loan should include assessment of several factors, including:

  • How much longer you plan to keep the automobile
  • How much the original loan amount has already been paid down
  • The likelihood you will be approved for the new loan and at what interest rate
  • The amount of potential savings in interest rate expenses that may be realized with the refinance
  • Any additional fees associated with the refinance process

If you do decide to refinance an auto loan, you should be aware this action could also potentially impact your FICO® Scores in several ways, including:

  • Typically, a lender conducting the refinance would pull your credit report from one or more of the credit bureaus, which results in the posting of a "hard inquiry", which can negatively impact a FICO Score.
  • If you are approved, that new credit obligation will likely be reported to all three credit bureaus—impacting time in file characteristics (months since most recently opened account, average age of accounts, etc.), which may also cause a decrease in score.
  • A key factor often affecting FICO Score calculations is the amount paid down on active or open installment loans. A larger amount of the loan balance paid down relative to the original loan amount reported equates to lower credit risk and a greater amount of points are awarded in the score as compared to when the amount paid down relative to the original loan amount is smaller or when there are no installment loan balances owed.

For example, your current loan shows a pay down to date of $5,000 ($20,000 original loan amount with current balance of $15,000 for example). If you refinance, your former loan would be reported with a $0 balance and be considered closed. The new loan would be reported with a $15,000 balance and original loan amount of $15,000—reflecting higher risk as a lower amount of pay down being reflected. This will likely result in a loss of points until a larger amount of the original loan amount is paid down.

Generally speaking, consolidating or moving debt from one account to another will usually not help the score since the total amount owed remains the same.