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Does Trading Your Car Affect Your Credit Score?
July 1, 2025
Quick Answers
Applying for a new auto loan when trading in your car results in a hard credit inquiry, which may cause a minor, temporary dip in your credit score.
If your trade-in has negative equity, rolling that debt into your new loan increases your total loan amount and can impact your debt-to-income ratio.
Successfully paying off your previous auto loan adds a positive account closure to your credit history, while the new loan offers a fresh opportunity to build credit.
What Does It Mean to Trade Your Car?
Trading in your car is the process of applying your current vehicle's equity toward the purchase of a new one, all within a single transaction at a dealership. The dealer appraises your car based on its condition, mileage, and market demand to present you with a trade-in value. This offered amount is then subtracted from the price of your next vehicle, effectively serving as a down payment.
This transaction is closely linked to financing and, by extension, your credit score. Since the trade-in value reduces the total amount you need to borrow, it can make securing a new auto loan more manageable. Your credit score will still be a primary factor for lenders in determining the interest rate and terms for the remaining loan balance.
How Trading Your Car May Impact Your Credit Score
Trading in your car often feels like a simple swap, but this financial move can ripple through your credit score. Understanding the process helps you navigate it with minimal negative impact.
- The New Loan Application. When you finance a new car after a trade-in, the lender performs a hard inquiry on your credit report. This action alone can cause a small, temporary dip in your score.
- Paying Off Your Old Loan. The trade-in value is applied to your existing auto loan. While paying off debt is positive, closing an established account can slightly reduce the average age of your credit history, a factor in your score.
- Opening a New Line of Credit. A new auto loan on your credit report lowers the average age of your accounts. This new debt obligation can also have an initial negative effect on your score.
- Shifting Your Debt Profile. The new loan alters your credit mix and increases your total debt. Lenders closely watch your debt-to-income ratio, and a larger loan could raise it, impacting future credit decisions.
- Building a New Payment History. Over the long term, consistently making on-time payments on your new loan will establish a positive payment history, helping your credit score recover and eventually improve.
How Much Will Trading Your Car Affect Your Credit Score?
Several factors determine how trading in your vehicle will impact your credit score. Here are a few key things to consider:
- Hard Inquiries. Lenders perform a hard credit check when you apply for a new auto loan. This can cause a small, temporary drop in your credit score, but the effect usually fades within a few months.
- Loan Payoff. Closing your old car loan can slightly alter your credit mix and the average age of your accounts. This may cause a minor, temporary dip in your score but is generally not a major concern.
- New Loan Account. A new loan increases your overall debt but also diversifies your credit history over time. Consistent, on-time payments on this new account will positively impact your score in the long run.
How You Can Avoid Trading Your Car Affecting Your Credit Score
Get Pre-Approved for Financing
Secure a pre-approved loan from your bank or credit union before visiting the dealership. Multiple inquiries for the same type of loan within a short window are typically treated as a single pull by credit bureaus, which minimizes the negative effect on your credit score.
Address Negative Equity Separately
If you have negative equity, avoid rolling it into your new car loan. Paying the difference with cash or a separate personal loan prevents your new auto loan from being unnecessarily large, which can help maintain a healthier credit utilization ratio and overall profile.
Space Out Credit Applications
Avoid applying for other types of credit, like credit cards or mortgages, around the same time you're financing a car. Spacing out hard inquiries gives your credit score time to recover and prevents lenders from viewing you as a high-risk borrower taking on too much debt.
Ways to Improve Your Credit Score
Improving your credit score is an achievable goal that relies on consistent, positive financial behaviors. With a few proven methods, you can boost your creditworthiness and open the door to better financial products.
- Check your credit reports. Regularly obtain your free credit reports from the three major bureaus to identify and dispute any inaccuracies that could be hurting your score.
- Always pay on time. Your payment history is the most significant factor in your score, so set up automatic payments to ensure you never miss a due date.
- Lower your credit utilization. Aim to use less than 30% of your available credit by paying down balances, which can have a quick and positive impact on your score.
- Diversify your credit mix. Lenders like to see that you can responsibly handle different types of credit, such as a mix of credit cards and installment loans.
- Limit hard inquiries. Avoid applying for too much new credit in a short period, as each application can temporarily lower your score.
The Bottom Line
Trading in your car can affect your credit score. While the hard inquiry for a new loan may cause a temporary dip, consistent payments on the new loan can help rebuild it.
Frequently Asked Questions
Does trading in a car hurt your credit score?
Initially, yes. The hard inquiry for the new loan and the new account can cause a temporary dip, but consistent on-time payments will help it recover.
Is it better to pay off my car loan before trading it in?
Not always. Paying off the loan closes an established credit account. Keeping it open until you trade can demonstrate a longer, more stable credit history to lenders.
What happens to my credit if I have negative equity?
Rolling negative equity into a new loan increases your total debt and your loan-to-value ratio, which can negatively impact your credit score by increasing your risk profile.
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