How Refinancing May Impact Your Credit Score

Refinancing can be a savvy financial move, but it often causes a temporary dip in your credit score. Understanding the process helps you anticipate these short-term changes and focus on long-term benefits.

1. The Hard Inquiry: When you apply for refinancing, lenders pull your credit report, resulting in a hard inquiry. This can slightly lower your score for a few months, signaling you're seeking new credit.

2. Rate Shopping Impact: Fortunately, credit scoring models typically bundle multiple inquiries for the same loan type made within a short window (usually 14-45 days), treating them as a single event to minimize score damage.

3. New Account Age: Opening the new refinanced loan reduces the average age of your credit accounts. A lower average account age is a scoring factor and can temporarily have a negative impact.

4. Closing the Old Loan: While paying off your original loan is great, closing an older, established account can sometimes affect your credit mix and the length of your credit history, another factor in your score.

5. Long-Term Recovery: The good news is that these effects are usually temporary. By making consistent, on-time payments on your new loan, your credit score will typically recover and can even improve over time.

How Much Will Refinancing Affect Your Credit Score?

The exact impact of refinancing on your credit score can vary, but several factors come into play. Here are the key considerations to keep in mind when you apply.

• Hard Inquiry. Lenders perform a hard credit check when you apply for a refinance. This can cause a small, temporary dip in your credit score for a few months.
• Average Age of Accounts. Opening a new loan reduces the average age of your credit history. A shorter credit history can have a minor negative impact on your score.
• Long-Term Impact. Consistently making on-time payments on your new loan will positively affect your payment history. Over time, this responsible behavior can help improve your overall credit score.

How You Can Avoid Refinancing Affecting Your Credit Score

Shop for Rates Strategically

Credit scoring models typically treat multiple inquiries for a mortgage within a short period as a single event. To minimize the impact, complete all your rate shopping and applications within a 14 to 45-day window to avoid multiple dings to your score.

Maintain Healthy Credit Habits

Ensure your credit is in top shape before applying. A higher starting score provides a buffer against any temporary dip. Continue making all payments on time, both before and during the refinancing process, to demonstrate financial stability and protect your score from further drops.

Avoid New Lines of Credit

Refrain from opening new credit cards or taking out other loans while you are refinancing. Each new application can trigger a separate hard inquiry, which can compound the negative effect on your credit score and potentially complicate your refinance approval with lenders.

Ways to Improve Your Credit Score

Improving your credit score is entirely possible and achievable through consistent, positive financial behaviors. While it's a gradual process, there are several proven methods you can use to boost your score over time.

• Monitor your credit reports regularly. Obtain your free reports to identify and dispute any inaccuracies or signs of identity theft that could be negatively affecting your score.
• Establish automatic bill payments. Your payment history is the most significant factor in your score, so setting up automatic payments helps ensure you never miss a due date.
• Reduce your credit utilization ratio. Aim to keep your balance below 30% of your total credit limit, as high utilization can lower your score.
• Become an authorized user. Being added to the credit card account of someone with a strong payment history can help improve your own credit profile.
• Diversify your credit mix. Lenders prefer to see a responsible mix of credit types, such as revolving credit from cards and installment loans like auto or student loans.
• Limit hard inquiries. Avoid applying for too much new credit in a short period, as each application can cause a temporary dip in your score.

The Bottom Line

While refinancing triggers a hard inquiry that can temporarily lower your credit score, making timely payments on the new loan can ultimately help build and improve your credit in the long run.

Frequently Asked Questions

How much will my credit score drop when I refinance?

The initial drop is typically minor, often just a few points from the hard inquiry. Your score can recover quickly with consistent, on-time payments on the new loan.

How long does a refinancing inquiry stay on my credit report?

A hard inquiry from refinancing stays on your credit report for two years, but its impact on your score usually lessens significantly after the first few months.

Can refinancing multiple times hurt my credit?

Yes, frequent refinancing can lower your score. Each application adds a hard inquiry and opening several new accounts can reduce your average account age, a key credit factor.