Can Refinancing Affect Your Credit Score?

Refinancing is a strategy that allows you to pay off your mortgage faster and save money on interest. However, before starting, you should ask yourself this question- does refinancing hurt your credit? If you’re planning to refinance your home loan, here’s what you should know:

When Can You Refinance A Loan?

You can refinance a loan in the following scenarios:

  • You have a good credit score and want to get a better rate. This can help you save money by reducing how much interest you pay over time. 
  • You have a bad credit score and need help building it back up again.
  • You want to combine several debts into one larger loan balance.

How does Refinancing a Loan Work?

Refinancing a loan is when you take out a new mortgage or home equity loan to pay off your old one. It’s essentially taking out a new loan to pay off an old one, except it comes with lower interest rates and better terms.

Credit Accounts

Credit accounts are the most crucial factor in your credit score, but you don’t have to worry about them too much. As long as you pay off your balances on time, you’re doing a good job keeping up with your credit. However, you should be aware that opening or closing an account can affect your credit score. 

Increased Hard Inquiries

When you apply for a loan, the lender will check your credit report to determine whether or not to approve your request. This is called a hard inquiry. Once a lender checks your credit report, it will be recorded on your account as a loan application and can stay there for up to 2 years.

The longer it takes for you to establish new accounts, the more opportunities you have to build good credit habits!

Decrease in the Length of Credit History

The length of your credit history is a factor in determining your score. This is calculated by adding the age of each account and dividing that total by the sum of all ages. If you close an account, this number will be reduced. If you open a new account, it will increase.

How can Refinancing Your Loan Affect Your Credit Score?

Refinancing your loan can affect your credit score. This is because many factors influence a borrower’s credit score, and refinancing involves several steps:

  • The number of hard inquiries you can make in 12 months. The more inquiries you make, the lower your credit score will be. 
  • Having an extensive history with no problems may give lenders more confidence to offer loans at higher rates than those with short histories. 
  • Multiple accounts opened with creditors, showing a lack of discipline in managing money.

Refinancing can affect your credit score, but it doesn’t have to hurt it

If you are considering refinancing, knowing that this action can affect your credit score is essential. Your credit score can improve if the debt you owe decreases or the interest rate drops significantly. However, if the debt amount increases or the loan is for more than what was initially owed, this will hurt your score.

According to financial advisors like Lantern by SoFi, “If you have a good credit score, you’re going to get more green lights to what you want: a loan with low interest, an affordable car insurance policy, a high-limit credit card.”

While it may seem like an easy way to save money on your mortgage, you should keep in mind that this process will affect your credit score.

 

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