Manage Money

How Does Refinancing Affect Your Credit Score?

Do you have an exorbitant loan that is getting too risky to handle? A heavy loan or a debt can be frightening and overwhelming. You might have taken the loan a really long time ago, and things could have changed a lot since then.

Refinancing can be a viable option for you in such a case. Refinancing allows you to make the debt easier to repay and improve the terms of your loan. It can reduce your interest rates and lower monthly payments as well.

What is Refinancing?

Refinancing is a process that conveniently allows you to replace an existing loan with a new one. This new loan would have better terms and should help you improve your finances. You can pay off your current debt with the new loan. Let me elaborate on the steps of refinancing to give you a better picture:
 

  1. You have an existing loan that you wish to improve

  2. Find a lender offering better loan terms

  3. Apply for the new loan

  4. Pay off the existing debt using the new loan

  5. Make payments on the new loan till it is settled

  6. Save money on the interest paid

Most loans, such as home loans, auto loans, student loans, and personal loans, have refinancing options.

Refinancing: Its Effects on Your Credit Score

Can refinancing affect your credit score? Maybe. Maybe not. Read on to know more.

Balance Inquiry

When you apply for a new line of credit, including a refinance loan, lenders will run a check on your credit report, which results in a hard inquiry. Hard inquiries reduce your credit score by a few points. The influence of a hard inquiry on your credit score decreases over time.

You can regularly monitor your credit report to gauge the impact of hard inquiries on your credit score. Use mymoneykarma’s Intelligent Finance Tool of to keep track of your credit report.

Account Closure

As you refinance a loan, your initial loan account will be closed, as you will be starting over with a new loan. This loan has a new opening date and no payment history. Some credit bureaus will consider your closed loan while calculating your average credit age, whereas some bureaus won't.

Similarly, some credit bureaus might even consider your payment history of the closed loan while making your credit report. However, it will receive much lesser importance than an active account. If you are planning on closing very old accounts, refinancing could be a sudden blow to your credit score.

Credit Mix

In case you are planning on refinancing to settle multiple lines of credit, you may want to stop and reconsider. The moment you choose to refinance an open line of credit, the older account is scraped and a fresh line of credit is initiated. Not only will this reduce your average credit age, but it will also mar the diversity of credit accounts that you maintained earlier.

The variety in the types of accounts you have can help you secure a better credit score. Refinancing might not be a great idea with respect to this aspect.

To Sum Up

So, we're back to square one: does refinancing affect your credit score or not? There is no indisputable answer to this. Be smart, consider your credit situation, and think twice before making a final decision. Go for refinancing only if it makes sense. Use mymoneykarma to know the best home loan refinancing offers for you.

It might or might not affect your credit score, but take my word for it - the ripples will not be very severe. Do the calculations well in advance, taking into consideration that your newly refinanced loan will also be added to the number of your total accounts as well as to your average credit age.

You can’t do much to speed up the aging of your loan or your payment history. Be patient. These factors will gradually improve over time. Meanwhile, check your credit score regularly to keep track of your credit standing.

×

Rate this article: