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Can Refinancing Hurt Your Credit?

Published in Credit Refinancing Impact 4 mins read

Yes, refinancing can indeed hurt your credit score. While often pursued for financial benefits like lower interest rates or reduced monthly payments, the process involves steps that can temporarily impact your credit standing.

How Refinancing Can Impact Your Credit Score

The primary reason refinancing may cause a dip in your credit score is the hard inquiry performed by lenders.

Hard Inquiries

When you apply for a new loan, whether it's a mortgage, auto loan, or personal loan, the potential lender typically checks your credit report. This type of credit check is known as a hard inquiry (or "hard pull").

  • What it is: A hard inquiry happens when a lender requests to view your credit report as part of a loan application. This signals to credit bureaus that you are seeking new credit.
  • Impact on score: Each hard inquiry can cause a small, temporary dip in your credit score, usually a few points. This impact is generally minor and fades over time, typically within a few months, and hard inquiries remain on your report for up to two years.
  • Multiple inquiries: If you shop around for the best refinancing rates, you might have multiple hard inquiries. However, credit scoring models often treat multiple inquiries for the same type of loan within a short period (typically 14 to 45 days, depending on the scoring model) as a single inquiry to encourage rate shopping. This is known as "rate shopping" or "deduplication."

Other Potential Credit Impacts

Beyond hard inquiries, other aspects of refinancing could also influence your credit score:

  • New Debt: Taking on a new loan, even if it replaces an existing one, can initially alter your debt-to-income ratio or the overall structure of your credit.
  • Closing Old Accounts: If refinancing closes your old loan account, it might reduce the average age of your credit accounts, which is a factor in credit scoring. Older, well-maintained accounts generally contribute positively to your score.
  • Payment History: While not directly a negative impact of the refinancing process itself, defaulting or making late payments on your new refinanced loan will severely damage your credit score.

Factors Influencing Your Credit Score During Refinancing

Understanding the components of your credit score can help you anticipate the impact of refinancing.

Credit Score Factor Description Potential Refinancing Impact
Payment History Timeliness of payments (most significant factor). Crucial for new and old loans.
Amounts Owed How much debt you have and your credit utilization. A new loan changes your debt profile.
Length of Credit History Age of your oldest and newest accounts, and average age. Closing old accounts can shorten average age.
New Credit Number of recent credit applications and new accounts opened. Hard inquiries fall into this category.
Credit Mix Diversity of your credit accounts (e.g., installment, revolving). New loan affects your mix.

Mitigating Credit Score Impacts When Refinancing

While some temporary dip is common, you can take steps to minimize the negative effects:

  • Shop Rates Strategically: Complete all your rate shopping for the same type of loan within a focused timeframe (e.g., 2-4 weeks). This allows credit scoring models to group multiple inquiries as a single event.
  • Maintain Excellent Payment History: Before, during, and after refinancing, consistently make all your other bill payments on time. Payment history is the most crucial factor in your credit score.
  • Avoid Other New Credit: Refrain from applying for new credit cards or other loans around the time you're refinancing. This prevents additional hard inquiries and reduces the appearance of high credit seeking behavior.
  • Check Your Credit Report: Regularly review your credit report for accuracy. You can obtain a free copy annually from each of the three major credit bureaus (Equifax, Experian, and TransUnion) through AnnualCreditReport.com.

Refinancing can be a smart financial move, and the temporary dip in your credit score is often a small price to pay for long-term savings. The key is to be prepared for it and manage your credit responsibly throughout the process.