Background

• Your credit score is calculated based on a number of factors, and each of these factors is weighted differently depending on the reporting agency. The three major reporting agencies, Experian, Equifax and TransUnion, all use similar formulas despite their different weighting systems. Those formulas account for your payment history, the length of your credit history, your total outstanding debt, new credit you have received and the types of credit you use. Changes to any of these factors will result in a corresponding change in your score.
  
  

Effects

• When you refinance your auto loan, you may change one or more of the factors that determine your credit score. For example, if you pay off a large portion of your debt and refinance to a short loan period, you will lower your outstanding debt balance. This would result in a positive increase to your credit score. On the other hand, if you refinance to a longer loan, your balance will stay high for a longer time, adversely affecting your credit. The overall effect of your auto refinancing depends on these details and the process you use to obtain your new terms.
  
  

Options

• The two primary options for refinancing are changing the terms with your existing lender or taking a new loan with another lender. In the first option, your score may change if your lender makes a credit inquiry against you, your loan balance changes or your terms change. All of these effects should be minimal . On the other hand, if you take a loan from another lender, there are different factors to consider. The lender will make an inquiry, perhaps change your loan balance, modify your terms and issue a wholly new loan. The impact of closing your existing loan and opening a new one will be larger than simply modifying the terms of your existing contract.
  
  

Considerations

• To keep your credit score high during a refinancing arrangement, try to modify directly with your existing lender. This will prevent the necessity to open a new loan. The effect on your credit is minimized. Within a few months, you may see no net difference in your score.
  
  

Warning

• Beware of contacts and advertisements from finance companies offering to refinance your debts with no negative impact to you. Often, these companies are hiding relevant items such as the impact the change may have on your credit or the additional fees associated with taking a new loan. Research the credit agency before refinancing, and do not buy in to "too good to be true" scenarios.