How does refinancing affect my credit score?
Refinancing is a popular way to get a better deal on a loan or credit account, such as a mortgage, personal or car loan. While refinancing has its benefits, it does affect your credit rating, usually causing a small temporary decrease. To help you understand the implications of refinancing a loan, here is a complete guide on How does refinancing affect your credit rating?
Refinancing affects your credit score in two ways:
When you check rates with a lender, they look at your credit history. This puts what is called a complex query on your credit report. Each loan request lowers your credit score by a small amount. When refinancing, the previous loan is technically closed and replaced with a new loan. Because old accounts are better suited to your credit history, replacing an old loan with a new one can lower your credit score.
You can minimize the drop in your credit score by making purchases promptly. That’s why – a few tricky inquiries can further increase and decrease your credit score. However, most credit rating systems group complex queries together if they refer to the same time period – 14 to 45 days.
The time period varies because different credit rating systems have their own rules. The new systems give you up to 45 days, while the old ones can only give you 14. Don’t risk sending all your applications within 14 days.
The type of loan you refinance can affect how it affects your credit rating, so let’s look at the two most common types of refinancing loans.
When you refinance your mortgage, it is considered a brand new mortgage. As a result, it can affect your reputation. Let’s say you have a $ 250,000 mortgage that is half paid. Repayment of 50% of the original loan amount is good for your loan.
You then get a mortgage refinance, resulting in a new mortgage with a $ 125,000 balance. This can lower your credit score because you haven’t paid any new mortgages. Even though you owe the same amount, it looks like you are not making progress in paying off the debt. In terms of credit rating, a $ 250,000 loan that you paid back up to $ 125,000 is better than a $ 125,000 loan that was not paid at all.
Even though your credit could be hurt, the benefits of refinancing your mortgage can more than offset this. A lower interest rate can save you many thousands over the life of your mortgage. Or, if you opt for lower monthly payments, you will save on one of the largest monthly bills.
If you do not want to lower your credit rating to refinance your mortgage, the alternative is to change your mortgage. With this option, you make a one-time payment. Your original loan term and mortgage interest rate remain the same, but in general you pay less interest because you paid off most of the principal. You also reduce your monthly payments. Most mortgage lenders offer recycling of conventional mortgage loans.
Refinancing a personal loan
When you refinance a personal loan, it will affect your credit score in the same way as refinancing a mortgage. For example, your credit rating may drop slightly if lenders take a close look at your credit report. A new loan can also lower your score because old accounts are considered the best in credit rating systems.
There is also a way to improve your credit score. If you refinance multiple personal loans, you have fewer loans to pay off. The less personal loans, the better for your credit.
While refinancing can lower your credit score, there are also potential benefits that make it worthwhile. By refinancing a loan, you are effectively replacing that loan with a new one. You can get better loan terms, especially if you have raised your credit rating after receiving the old loan. Your benefit depends on your goals. Here are some examples of reasons for refinancing:
Providing a lower interest rate
Reduced monthly payment
Save money on interest with shorter maturities
Consolidation of multiple loans
Change of loan type (for example, switching from a variable rate loan to a fixed rate loan)
Of course, refinancing can have downsides. If you reduce your monthly payments, it will likely lengthen the loan maturity and make you pay more interest overall. If you receive a shorter maturity, your monthly payments will