Is It True That Refinancing Harms My Credit?
Why does refinancing have an impact on credit scores?
Your credit score will be impacted whether you're looking to refinance your home, vehicle loan, school loan, or personal loan. Expect a slight decline in your score for two reasons, but here's our first piece of advice:
Stay away from the surprise party.
Before you submit any refinancing applications, get a free copy of your credit report. Each of the three main credit agencies, Equifax®, Experian®, and TransUnion®, is required to provide you with a free report every 12 months. Requesting a copy of your own credit report is a "soft" request that will not harm your credit score if you haven't utilized your free credit check in the previous 12 months.
Obtaining a sneak look allows you to repair any inaccuracies on your report, allowing lenders to see your highest potential score when calculating your qualifying rate. As recommended by the Consumer Financial Protection Bureau, submit your request through the only federally approved site, AnnualCreditReport.com.
There are two reasons why refinancing will drop your credit score, and one thing you may do to mitigate the effect:
1. Multiple hard inquiries: A "hard" inquiry is when a lender looks at your credit record. When many lenders do hard inquiries on your behalf over a period of months, each query hurts your credit score independently. For a period of two years, hard queries remain on your report.
What you can do about it is as follows. Make sure all of your ducks are in a row. Prepare a list of lenders to contact and submit all of your applications in a timely manner.
If you compare rates with four lenders over a longer period of time, and each hard inquiry lowers your score by roughly 5 points, your score will decline by about 20 points. If, on the other hand, you submit all of your applications so that suppliers can make requests within two weeks, the requests will be counted as a single hard inquiry. This will only lower your score by a few points, rather than 20 points, and your score will most likely recover within a few months if you make on-time payments. Similar requests can now be grouped together if they are submitted within 45 days of one other, according to new credit scoring. Older scoring, on the other hand, restricts the grouping period to only two weeks. Given this, it's advisable to submit any loan requests within 14 days, if at all feasible.
Another piece of advice: After refinancing, don't have any further hard queries pulled for at least a year.
2. Old debt becomes "new" debt: Lenders prefer older loans to new ones since they demonstrate your track record. Long-term accounts in good standing are preferred by lenders. While payment history accounts for 35% of your FICO® score, duration of credit history accounts for 15% of your score. When you refinance, your old loan is paid off and a new one is started. Your good credit history ends, and you're saddled with "new" debt. On your new account, you can rebuild a positive payment history, but it will take time.
To Sum It Up
Refinancing will initially affect your credit score, but it may really benefit you in the long term. Refinancing your home can drastically reduce your loan amount as well as your monthly payment, which lenders want to see. Your score may drop a few points, but it should recover within a few months. You take on a new loan when you refinance. While racing around the HasbroTM Sorry!® gaming board, it's like being sent back to the beginning. It's only a short setback; you still have a chance to win!