Are you always looking for good credit card deals? Do you keep track of current interest rates to see if it’s a good time to refinance your current mortgage or auto loans? If you’re a financially savvy person who’s trying to save as much as possible when you borrow money, you know how important it is to maintain a good credit score to get the best rates. So did you ever wonder if refinancing your loans could affect your credit rating?
The answer depends on how your refinancing requests are processed—and how vigilant you are in making sure that everything goes through in a timely manner.
When you’re applying for refinancing, the lender checks your credit report with one of the three major credit bureaus. This is known as hard inquiry on your credit report, and it can lower your score by a few points (usually less than five). That’s because potential lenders see a hard inquiry as an indication that you want to borrow money or increase the amount of credit that you have available. Fortunately, the longer you’ve maintained good credit, and the more accounts you already have, the less impact a single hard inquiry is likely to have.
Your credit score is also affected by the number of hard inquiries on your credit report during a certain time period (usually a year or two). For example, if you’re looking for better credit card rates and apply for several cards within a short time period, your credit score is going to take a hit because lenders wonder why you need all that borrowing power. (According to FICO, the company that provides the scoring software that lenders use to determine your credit score, people with six inquires or more on their credit reports are eight times more likely to declare bankruptcy than people with no inquiries on their reports.)
Fortunately, multiple applications (and multiple hard inquiries) aren’t usually a problem when it comes to refinancing a mortgage or a vehicle loan. Lenders realize that you may be shopping around to see where you can get the best rate. As long as you make all your applications within a short time period—which can vary from two weeks to 45 days, depending on which credit scoring software the lender is using—applying for several refinancing loans shouldn’t be a problem. Any hard inquires made for this purpose during that time period will be considered a single hard inquiry.
What happens to your credit score once you’ve refinanced your loan? According to FICO, the way a lender reports that loan to the credit bureau could make a difference. If they indicate that it’s a refinancing—and therefor the old loan has been paid off—the refinancing loan shouldn’t have an impact. If the lender indicates that it’s a new loan, however, it could look like you have the equivalent of two mortgage loans open. That could increase your debt to income ratio and lower your credit score. To make sure that doesn’t happen, check your credit report within a month or two of refinancing to ensure that all the financial transactions have been reported properly.
Finally, watch out for missed payments due to delays in the refinancing process. Your new mortgage lender may have told you that you can skip a payment to the previous mortgage holder because it would be covered during settlement. But if the refinancing settlement doesn’t take place as originally scheduled, and payment is due on your original loan, make sure that you make that payment. If you don’t, your original mortgage company might report that you missed a payment—and your credit score will take a hit.