How Does Refinancing Affect Your Credit Score?


If you have a long-term loan like a mortgage or car payment refinancing can be a great way to lower monthly payments and your interest rate. What effect, if any, does refinancing have on your overall credit score?

Preparation is key

If you have a good or decent credit score to begin with you may have the option of refinancing a major loan. Before you pull the trigger and even apply make sure you have all of your ducks in a row. What are your chances of getting approval? Which one is right for me? What are the acceptable parameters I am looking for?

Hard inquiries

Once you apply to refinance a loan a hard inquiry will hit your credit report which will lower it a few points or more if you've had a lot of inquiries. While it is generally something that will roll off in time (24 months to be exact) doing too much applying can cause your score to decrease significantly putting your ability to even get a refinanced loan in jeopardy the first place. You can also try rate shopping which means sending out inquiries in a short period of time so they only ding your credit once (but read up on that before you do).

Closing established accounts

If you are approved for a refinanced loan your old loan will be closed off and the new one opened. Since creditors favor older accounts this may drop it a few points as a long-established line is closed and a new one with no payment history is established. As long as you have other accounts that are in good standing and have existed for a good amount of time you should not see a major loss.

Some tips:

Take it slow and look at your options before applying. Is the new interest rate actually going to save you money? A new loan will be for a longer period of time than your current one. Do a little math while looking at your options so you don't end up paying more interest over time with a new loan.

If you are looking at buying a house in the near future you may want to hold off on refinancing your auto loan. Your score will dip a little during the process which could make your interest rate for a mortgage increase, sometimes significantly.