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Does Refinancing Hurt My Credit?

Why refinancing affects credit scores.

Whether you’re considering to refinance your mortgage, car loan, student loan, or a personal loan, your credit score will definitely be affected. You should expect your score to drop a bit for two reasons, but here’s our first bit of advice:
 

Avoid the surprise party

 
Request a free copy of your credit report before submitting any refinancing applications. You’re entitled to a free report every 12 months from each of the three major credit bureaus: Equifax®, Experian®, and TransUnion®. Requesting a copy of your own report is considered a “soft” request and will not hurt your credit score as long as you haven’t already used your free check within the past 12 months.
 
Getting a sneak peek enables you to have any errors on your report corrected, so lenders will see your best possible score when determining your qualifying rate. Make your request through the only federally authorized site, AnnualCreditReport.com, as directed by the Consumer Financial Protection Bureau.
 

Two reasons refinancing will lower your credit score — and one action you can take to lessen the impact:

1. Multiple hard inquiries:

When a lender looks at your credit report, it is called a “hard” inquiry. When multiple lenders make hard inquiries on your behalf over several months, each inquiry will individually hurt your credit score. Hard inquiries remain on your report for two years.

Here’s what you can do about it. Get your ducks in a row. Line up the lenders you would like to contact and submit all of your applications within a short time frame.
 
If you shop rates with four lenders over a longer period of time and each hard inquiry reduces your score by 5 points or so, your score will drop by about 20 points. Conversely, if you submit all your applications so that vendors make requests within a two-week time frame, the requests will be counted as only one hard inquiry. This will reduce your score by only a few points, instead of 20, and your score will likely rebound within a few months with on-time payments. New credit scoring enables similar requests to be grouped as one, if they are made within 45 days. Older scoring, however, limits the grouping time frame to only two weeks. Knowing this, it’s best to have all lender requests submitted within 14 days, if possible.

Our other advice: Avoid having additional hard inquiries pulled for at least one year after refinancing.
 


Old debt becomes “new” debt:


Older loans are preferred to new ones because they show lenders your proven track record. Lenders like to see long-term accounts in good standing. While payment history makes up 35% of your FICO® score, 15% of your score is based on length of credit history. So, when you refinance, your original loan is closed and a new one is opened. Your good track record ends and you incur “new” debt. You can rebuild good payment history on your new account, but it takes time.
 

In conclusion:

 
Refinancing will hurt your credit score a bit initially, but might actually help in the long run. Refinancing can significantly lower your debt amount and/or your monthly payment, and lenders like to see both of those. Your score will typically dip a few points, but it can bounce back within a few months. When you refinance, you take on a new loan. It’s like being bumped back to Start while racing around the Hasbro Sorry!® game board. It’s a temporary setback, but you can still win!
 
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