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Refinancing debt can be a financially savvy move in an array of different circumstances, particularly if you have the chance to get a lower monthly payment or a lower interest rate through the process. There are additional scenarios in which refinancing may be helpful for you or an absolute requirement. For example, you may need to refinance a home or a car because you're going through a divorce and you need a loan in your name only.
But, does refinancing hurt your credit score? The first detail to know is that, for the most part, any negative impact to your credit caused by refinancing will only be temporary. If you want or need to refinance debt and are wondering how your credit score will be undermined, read on to learn what happens when you refinance a car, student loan, mortgage, personal loan, or other debts like credit cards.
How refinancing can lower your credit score
Taking steps to refinance any type of loan can harm your credit score and overall credit health in the following ways:
Closing the old account
The length of your credit history makes up 15% of your FICO score, and this factor can come into play when refinancing a debt leaves you closing the old account. That said, closing an old account in good standing can still have a positive impact on your credit score since these accounts and their history can stay on your credit reports for 10 years. Meanwhile, making on-time payments on the new loan will help your credit score over time.
New credit makes up to 10% of your FICO score. Applying for a new loan will have a negative impact because each new loan you apply for results in a hard inquiry on your credit reports. Fortunately, the impact from a new hard inquiry on your credit reports is typically short-lived, lasting only a few months at most.
Multiple loan applications
If you're looking for the best possible deal when you refinance, you may want to apply for loans with several different lenders. You may wind up with multiple hard inquiries and loan applications in this situation, which could negatively impact your credit. The good news is, many credit scoring models treat multiple loan applications of the same type (e.g. auto, home, etc.) as a single inquiry if they fall within the same 14 to 45 day time period.
Refinancing an auto loan
Refinancing an auto loan can make sense in several different circumstances. For example, you may be able to benefit from a new car loan if interest rates are lower now than they were when you originally took out the loan. Or, if your credit score has improved, you may be able to move from a subprime loan to a prime loan.
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Before you refinance a car, you'll want to use a loan calculator to see how much you could save by refinancing. Keep in mind that if you're extending the repayment term of the loan when you refinance, your total interest costs may be greater even if you're getting a lower interest rate.
Refinancing student loans
Consider refinancing student loans if you are serious about paying them off as soon as possible and can qualify for a lower interest rate that leads to significant financial savings. That said, pay attention to where you refinance. Refinancing federal student loans with a private lender means giving up federal protections like deferment and forbearance.
Switching from federal to private loans also means giving up access to federal loan forgiveness programs like Public Service Loan Forgiveness (PSLF) and income-driven repayment plans. To preserve your protections and access to forgiveness while consolidating your federal loans into one payment, look into the federal government’s Direct Consolidation Loan program. Just remember that a Direct Consolidation Loan won't help you get a lower interest rate since these loans use a weighted average of the existing rates on your federal student loans.
Another option if you have a mix of loans: Refinance only your private student loans with a private lender and look into the federal consolidation program for your federal loans.
Refinancing a mortgage
Trading an old home loan for a new mortgage can be a good move if it results in a lower monthly payment, a lower interest rate, or both. Consumers often refinance to switch their mortgage repayment term as well (e.g. moving from a 30-year mortgage to a 15-year home loan), or to remove a borrower from the loan due to divorce.
If you go this route, make sure that you keep up with payments on the old loan while your mortgage refinance is in process. Missing a mortgage payment on your original loan can cause considerable damage to your credit score even if it happens by accident.
Refinancing personal debt
You can also consider refinancing personal loans, credit cards or both. Many consumers take this step in order to consolidate their debts at a lower interest rate, or to go from having multiple loan payments each month down to just one.
Note that refinancing a personal loan or other personal debts will result in a hard inquiry on your credit reports just as with other loans. This can temporarily ding your score, but making on-time payments on the new loan and your other debts will help your score rebound.
When should you refinance your loan?
Refinancing a loan can help you save money or secure a more affordable monthly payment, but there are still scenarios where you're better off keeping the loan you have. The chart below highlights some situations where you should refinance, as well as scenarios where you should skip refinancing and stay on course with your current loan.
|Loan type||When to refinance||When not to refinance|
Student loans (private lender)
What to do after refinancing
Refinancing a loan results in a hard inquiry and new debt added to your credit reports. This combination of changes can temporarily ding your score. However, your credit score can quickly rebound if you make the right moves right after a refinance. For the best results, here's exactly what you need to do:
Avoid racking up revolving debt
While installment loans like personal loans and auto loans don't impact your credit utilization ratio (a factor that makes up 30% of your FICO score), revolving debt like credit card debt does. To help your credit score as much as possible after a refinance, avoid letting your credit utilization ratio go over 30% of your available credit limits. If you can keep your utilization below 10% of your available limits, that's even better.
Monitor your credit score
Use credit building and monitoring services like myFICO.com and Experian to track your credit score and progress over time. You can also use free tools like Chase Credit Journey and Capital One CreditWise to monitor your credit score.
Pay all your bills early or on time
Since the most important determinant of your credit scores is your payment history, making all your bill payments early or on time can help you improve your credit more than anything else. Making this move after a refinance will ultimately get your credit score to reach new heights over time.
How to protect your credit when refinancing your home
Refinancing a home takes a considerable amount of time and effort, and it's crucial to take expenses like closing costs into account. You'll also want to make sure you keep tabs on your old home loan and avoid missing a payment during the refinance process. There may be a brief period where it feels like you're transitioning to the new home loan but you still owe a payment on the old one.
Your new lender may even tell you that you can skip your last payment on your old mortgage, yet this can prove catastrophic for your credit if the payoff for your old loan arrives later than expected, or after your payment due date. Our advice? Keep an eye on your old mortgage due date and balance on a daily basis, and make sure you know it's paid off and the balance is $0 before you skip a loan payment.
TIME Stamp: Refinancing can benefit you, but run the numbers first
Refinancing a loan can temporarily ding your credit score, but what matters more is how responsibly you treat your credit in the long run. If you keep debt levels low compared to your income and you always make on-time payments, you'll position yourself for the best possible credit even after a refinance.
That said, refinancing a loan may not always make sense. You'll want to run the numbers with a loan calculator to know for sure, or at least consider all the benefits you're getting out of the deal. If you find the upside of a refinance is minimal or your new loan will actually cost you more over time, it can make sense to stay the course with the loan you already have.
Frequently asked questions (FAQ)
Does refinancing have any negative effects?
Refinancing a loan will result in a hard inquiry on your credit reports, and this can temporarily lower your credit score. However, the advantages of a refinance can outweigh any potential credit score impact if you're saving money on interest or getting a monthly payment that makes more sense with your budget.
At what point is it not worth it to refinance?
Skip refinancing a loan if the closing costs or fees (including origination fees) wipe out the financial benefits. Also steer clear of refinancing if the new loan will actually cost you more in the long run.
How long does a refinance stay on your credit?
Hard inquiries stay on your credit reports for up to two years. However, the new refinance loan will stay on your credit report as long as it's open. Loans closed in good standing stay on your credit reports for 10 years.
What's a good credit score to refinance?
The credit score that makes refinancing a good option for you can depend on the credit score you had when you originally took out a loan—as well as the type of loan you want to refinance. A refinance will typically make the most sense if you have a good credit score, or a FICO score of at least 670.
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