How Refinancing Affects Your Credit Score
Prior to exploring the option to refinance an existing loan, it is important to know that it can affect your credit by temporarily lowering you credit score. There are a few ways in which this might happen.
When you first apply to refinance a loan, lenders will make a hard inquiry on your credit report, checking your score and history, which can temporarily cause a dip. This however is offset because of the money you save through refinancing, and overtime as you pay back the loan with reduced rates, your credit score will rise because of the strong payment history.
The hard inquiries effect of dipping credit score is compounded if you shop around and submit multiple applications to different lenders while looking for the best possible interest rate. This, too, can be mitigated by submitting your application within a short space of time—most credit scoring models treat loan applications between a 14- and 45-day period as one application. Submitting all your applications within this period will have a much better effect than if you submit them over a period of months.
Closing an Account
Similar to the initial hard inquiry, closing an account can have a temporarily negative effect on your credit score. This is due to the fact that you are closing a long-standing credit account. On the other hand, some credit scoring models take into account you payment history on the closed account, and if you have closed it in good standing, the negative hit on your credit score is lessened. Plus, as you pay back the new loan, again, like the hard inquiry, your credit score will improve gradually.
While your credit score will decrease, because of the above and the fact that you haven’t yet proved you can repay the new loan, you can negate this by making your payments on time.