Does Refinancing A Loan Affect My Credit Score?

Personal loans are useful when making large purchases like a new home or car. Like many purchases, it’s possible for a loan to become less suited to your needs as better options become available. Whether your credit score was less than ideal or interest rates were higher at the time you originally borrowed, refinancing a loan lets you align your lending needs to match your current situation and save money along the way.

Through refinancing, a new financial institution may allow you to take out a new loan to pay off an older loan. This process lets you save money by securing a lower interest rate, extending a repayment term, or a combination of the two. Whatever your reason, do you know how refinancing a loan can affect your credit?

Before Refinancing A Loan

Before refinancing a personal, auto, or mortgage loan, it’s a good idea to check if your credit has improved since taking out the original loan.

Potential lenders are going to review your credit report for a record of your credit accounts and activity. They’ll want to know that the new loan doesn’t put them at risk. Cleaning up and disputing errors on your credit report before applying for a refinanced loan may help to boost your credit score. The more you’re able to improve your credit score, the better opportunity you’ll have to receive the lowest possible interest rate.

The good news is that checking your credit report and score won’t negatively impact your score. These are soft inquiries that are not factored into your credit score calculation. In other words, you’re safe to check these essential items as many times as you need before applying for a refinanced loan.

How Refinancing A Loan Affects Your Credit

While checking in on your own credit doesn’t affect your score, refinancing a loan may. Refinancing can affect your credit score by:

• Shortening your account history: Funds from a refinanced loan are used to pay off the original loan. This closes the original loan account and may negatively impact your credit score by reducing the average age of your credit accounts.

• Increasing the number of credit checks: Refinancing requires a lender to check your credit score and report, resulting in a hard credit inquiry. These types of inquiries can result in a dip to your score, depending on how many take place and how closely together they’re made. Luckily, credit inquiries only slightly negatively affect your credit score. 

Shop Around For The Best Interest Rate

Finding the best interest rates for a refinanced loan typically involves shopping around. While multiple unrelated hard credit checks can lower your credit score, credit scoring models view multiple hard inquiries for the same type of loan as a single inquiry as long as they occur within a grace period. This grace period can range from 15 to 45 days.

Comparing multiple mortgages, for example, won’t negatively impact your credit score any differently than applying for a single mortgage – if you work quickly. If you spend several months on the process, it’s possible your credit score could take multiple hits and make it difficult to qualify for the best rates.

How Does Refinancing A Loan Affect My Credit?

Refinancing is a smart way to save money by restructuring debt that is no longer the best fit for you as the borrower. Regularly checking your credit report and your credit score can help determine the best time to apply for a new personal loan. Shopping around with multiple lenders can help secure the best interest rate available.

The refinancing process has the potential to slightly decrease your credit score but as long as your payments are made on time, it isn’t likely to affect your credit significantly over the long term.