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How refinancing affects your credit score

How refinancing affects your credit score

September 16, 2016
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Refinancing can come with a lot of benefits. It can help you get lower interest rates, lower monthly payments or it can let you pay off your mortgage faster. But refinancing is still a loan. It means that you pay a loan with another loan. So how does this new loan affect your credit score?

The effects refinancing has on credit scores

Since refinancing is a new loan, when you apply for one, your creditors will run your credit report. This, in turn, will result in new hard inquiries.

Unfortunately, hard inquiries will lower your credit score by a few points and can remain on your credit report for two years. As time passes, however, the damage to your score decreases or even disappears, often even before the hard inquiry falls off your credit report.

Refinancing also means that you close an old loan and start a new one with a new open date and a nonexistent payment history. Some scoring models may still factor in the closed loan, but, if they don’t, the average age of your accounts will decrease. That old loan that you had for so many years came with its own payment history. And payment history is heavily factored into your credit score. That’s why closing an old account can be a huge blow to your credit health.

Don’t let fear ruin your plans

It’s always a good idea to be careful and to think about your credit when making financial decisions. This being said, if refinancing makes sense, then there’s no reason you shouldn’t go for it.

If you’re responsible and take good care of your finances, there’s a chance that you’ll only see minimal changes in your credit report. But this doesn’t mean that you shouldn’t keep a close eye on any details related to your refinancing. If you feel that they’re incorrect, reach out to your creditor and file a dispute. Otherwise, that may cause real harm to your score.

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