Question by BleadGreen: Will refinancing my auto loan to a lower monthly payment and less interest paid out, hurt my credit score?
I’m preparing to buy a house next year and doing everything in my power to increase my credit score when the mortgage process starts. I have an auto loan @ 6.24% interest rate, and my truck will be paid off in 3 years. I’ve pretty good credit right now. However, if I decide to refinance my auto loan for a lower interest rate and monthly payments, will that hurt my credit score?
Answer by Rush is a band
The lower rate and the lower monthly payments won’t hurt your score. What might cost you a few points initially is the application for the new loan as seeking new credit always lowers your score. The fact that you would then re-pay the old loan and then not seek new credit for a while should bring it back up.
Know better? Leave your own answer in the comments!
Maybe it will cost you a point or two. A lot depends on what else is in your credit report.
But, what will be a large help to you is the reduced monthly payment. That will far overshadow the minimal drop in credit score. One of the things that lenders look at is your debt to income ratio. By lowering your car payments, you are increasing that ratio, and demonstrating that you can better afford the payments.
I say do it. Any reduction in the the interest you are paying is a good thing.
the real answer is yes. paying off your loan can hurt your credit score. The first auto credit score will be paid off and that builds credit. However your new loan will have a high balance and will add new debt that lenders will look at. If you want to increase your credit score make larger payments on the car loan. In order to increase your credit score make sure you pay off balances and DO NOT GET YOUR CREDIT PULLED BY A LENDER. Also make sure you order a copy of your credit score (this does not count against you) so you can check for errors. finally make sure your good credit is updated as this can really help build your score.