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Does Refinancing Impact my Credit Score?

Feb 05, 2021
By Mariclare Cranston, Content Specialist

If I refinance my car loan or mortgage, will it hurt or help my credit?

Ever thought about refinancing your car loan or mortgage? Then you’ve probably wondered what will happen to your credit score if you do refinance. After all – what good is a refi if it’s going to do more harm than good?

The truth is, refinancing is a major financial decision. And like any financial decision, you need to look at the entire picture. To get you started, we’re breaking down how refinancing can both help and hurt your credit.

Here’s How Refinancing Can Help Your Credit

A refinance pays off an existing loan and replaces it with a new loan with new terms. This is important because your credit score measures how well you manage your debts. By paying off a loan, you demonstrate to the credit bureaus that you can responsibly manage your money. This could bump your score up. And because you’re replacing one installment loan with another, you’re keeping a good mix of credit types. This is also a positive factor in your score.

By refinancing, you’re usually going to have a lower monthly payment as well – giving yourself a better shot at making those payments on time. You may even find yourself able to pay more than the minimum monthly payment. This can help drive your credit score up. A good payment history is one of the most important components of your credit score. In fact, MyFico confirms that payment history accounts for 35% of your score. So if you’ve been struggling to make payments, refinancing can help you build a good payment history and improve your credit score.

Thinking about refinancing your car loan? Check out the top 4 things to consider first. Read It Now

Here’s How Refinancing Can Hurt Your Credit

Your Application Results in a Hard Inquiry

When you start shopping for a refinance, lenders will pull your credit to determine your eligibility. These credit checks are hard inquiries, and each hard inquiry can lower your score. The best practice is to do all of your rate shopping in a short amount of time. Experian confirms that most credit score models will treat multiple inquiries in a short timeframe as a single inquiry. While a hard inquiry can lower your score a bit, getting right on track with on-time payments on your refinanced loan will help negate that loss.

When you check your own credit, this is known as a soft inquiry and doesn’t impact your score at all. Experts recommend checking your score at least once a year, and before applying for loans.

You Apply Multiple Times

While rate shopping within a short period of time lessens the impact on your score, rate shopping, applying for multiple refinances, or applying for additional loans over a period of months can have a longer-term negative impact on your score. If you apply multiple times over a period of months your score doesn’t have the opportunity to recover. This could result in a longer-term reduction in your credit score.

In addition, when you refinance, you’re opening a new loan. A new account can negatively impact your score. As you start making timely payments, though, your score will be able to bounce back.

You’re Closing an Account

Good payment history and length of credit are both important factors in your credit score. Refinancing pays off your original loan, eliminating that credit history – so closing that original loan could lower your score. If your payment history on the original loan was good, though, some credit models will take that into consideration. And if you make on-time payments on your refinanced loan, you’ll start building that good history right back up.

If you’re refinancing your mortgage, it’s important to keep making payments on your original mortgage until the refinance is complete. Some lenders will tell you to stop making payments as the refinance pays off the original mortgage. If there’s a delay, however, you could get hit with late fees from your original lender.

How Do I Know if Refinancing is Right for Me?

The impact refinancing can have on your score is just one thing to consider. Before moving ahead with a refinance, think about these other pieces of your financial story.

  • Change in rate. Is your refinance rate good enough to justify the refinance process? Use our auto loan or mortgage calculator to estimate what your new payment would be. Estimating your new monthly payment will help you determine if refinancing makes sense for you right now.

  • Current credit health. Has your credit score improved since you first took out the loan? If so, you may be able to get a better interest rate with a refinance. And a lower rate could mean lower monthly payments or a quicker payoff.  

  • No plan to buy a home soon. If you’re thinking about refinancing your car loan, be sure you don’t have any plans to purchase a home in the next few months. You’re going to want your credit to be as healthy as possible before applying for a mortgage. Refinancing does impact your credit, so be sure you either hold off until after your home purchase or leave enough time for your score to recover.

Keep in mind that refinancing isn’t a quick fix. Think about your long-term financial goals, your current financial health, and your realistic ability to make payments before moving forward with a refinance.

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