Choosing to refinance a loan can make a difference in your financial situation. Refinancing is available for many car, personal, and student loans, but the most popular option is refinancing your home loan. Many people choose to refinance their mortgages because of the potential benefits, but as with any major financial decision, there can also be risks. One common question is: does refinancing hurt your credit?
Why Do People Refinance?
Refinancing can allow you to save on monthly payments and start a new loan with lower interest rates. Refinancing can also be a way to get a new loan with a shorter term. People also refinance for the opportunity to access the equity in their homes to help with consolidating debt or pay for renovations.
Does Refinancing Hurt Your Credit Score?
Refinancing can hurt your credit score at first because applying for any kind of loan affects your credit. Usually, it isn’t too much of a change, but your credit score may go down a few points.
Your credit is also affected when you close an account, which is part of the refinancing process—you close your existing loan to open a new one. How much it is affected depends on certain circumstances. The size of the loan and how long you’ve had it are the biggest determining factors.
Refinancing might actually help your credit score over the long term, as choosing to refinance can help you pay off your debts, especially if the new loan includes lower monthly payments and/or interest rates. In this instance, your credit score could not only return to what it was before but could also improve.
You can also take measures to manage just how much refinancing does hurt your credit.
Does Refinancing Hurt Your Credit History?
As we’ve discussed, part of the way refinancing can hurt your credit history has to do with trading the old debt for new.
Refinancing essentially opens a new loan. While this has a number of benefits, it also means the end of your old loan. So, if you were in good standing with your old loan, that history is reset after refinancing. Roughly 15 percent of your credit score is based on your credit history.
Fortunately, if you make the same moves that got you into good standing in the first place, you can rebuild that history. So once the new loan opens, make sure to continue making payments on time.
How Do You Prepare for the Possibility of Refinancing Hurting Your Credit Score?
Being prepared is always smart. One way to do so is to request a free copy of your credit report early on in the process, before you apply to refinance.
Wait, will requesting a copy of your credit report hurt your credit? Typically, you are entitled to request a free copy of your credit report from each credit bureau once every 12 months. So, if you haven’t already requested a copy in the last year, it should not affect your credit.
Can You Avoid Refinancing Seriously Hurting Your Credit?
In addition to being prepared, there are other actions you can take to lessen the blow.
First, application success depends on you maintaining good financial standing, so continue to make your monthly payments on time.
You should also only apply for a refinance when you’re sure that’s the right type of loan for your situation. Applying for many different types of loans at once can hurt your credit. While it’s smart to look at and apply with multiple lenders, you do not want to space these applications out. It’s best to avoid multiple hard credit inquiries.
One hard inquiry can mean less than five points off your credit score, but if you get multiple hard inquiries, the damage can begin to add up. This is another reason you’ll be glad to have prepared ahead of time. Look into lender options before sending in applications. When you have compiled a list of lenders to try, send all the applications out in quick succession.
If you send out all the applications within 45 days or less, it will all count as one inquiry instead of multiple. The difference in points deducted means refinancing doesn’t hurt your credit as much as it could if you had multiple hard inquiries.
Is There an Ideal Time to Apply to Refinance?
Choosing the best timing may be another way you can control how much refinancing hurts your credit.
It is recommended to refinance when your credit score is high, especially if it’s notably higher than it was at the start of the loan. Additionally, it will pay off to refinance when interest rates are lower than when you first got the loan.
This is also why you should compare lenders ahead of applying; you will want to find the lenders that offer the lowest rates.
Does Refinancing Multiple Times Hurt Your Credit More?
While many refinance once, it’s possible to refinance multiple times. As long as you don’t refinance twice in one year, it shouldn’t cause additional damage to your credit.
However, there is another thing to keep in mind: when you refinance, you are closing on one loan and opening another. This usually means you’ll be charged closing fees and closing costs for the new loan. So, if you choose to refinance more than once, you’ll have to pay these fees multiple times. This will be less of an issue if you find a refinance option that excludes closing costs, another factor to keep in mind when looking at potential lenders.
