Choosing to refinance debt is never an easy decision. It usually happens when credit becomes increasingly difficult to manage and refinancing becomes a solution at the expense of paying a higher interest. Regardless of the reasons as to why someone would choose to refinance, it is important to understand the relationship between refinancing and credit score.
Refinancing can affect your credit score in 3 major ways:
- Hard Inquiries
A hard inquiry is a credit report requested by a lender. When you apply for a loan, the lender will check your credit history and score. This hard inquiry can cause your credit score to go down. This is a temporary credit score drop and will recover over time without you doing anything different. If you do get a loan, paying the new loan over time with no payment delays will bring your credit score up faster.
- Multiple Loan Applications
As stated above, applying for a loan results in a hard inquiry. If you apply to multiple lenders to compare interest rates, your credit score will drop with each application. There is a way to avoid this. Most credit score models consider all hard inquiries between periods of 14 to 45 days as a single inquiry which reduces the hit your credit score will take. Not all lenders apply this rule the same way when they consider your refinancing application.
- Closing accounts
When you refinance one or multiple loans into a single loan, the loans that you are refinancing will be closed. The way the credit score analyzes these events negatively affects your score. Closing a long-standing credit account will lower your score. What is important to know that this occurs after refinancing your loans. If you do not plan on taking other loans in the near future, your credit score should not matter all that much.