Does refinancing affect your credit score?
Quick insights
- Applying for refinancing typically requires a hard credit check that may temporarily impact your score.
- Closing your original loan and opening a new one can change the average age of your accounts, a factor sometimes included in credit scoring.
- Making consistent, on-time payments on your new loan could potentially help your credit profile over time.
Many people choose to refinance their loans to seek better terms or lower monthly payments. Before you start the process, it may be helpful to review the potential impact on your credit score. Let's explore how refinancing could affect your credit score to help you make a more informed decision.
Does applying for refinancing affect your credit score?
When you apply to refinance a mortgage, auto loan or personal loan, lenders typically perform a hard credit check, which will lower your score, but the effect is usually minor and temporary. A hard credit check happens when a lender reviews your credit report to make a lending decision. This action is recorded on your credit report provided by Experian™, Equifax® or TransUnion® credit bureaus.
If you're shopping around for a new rate, multiple hard credit checks within a short period may be treated as a single check, depending on the credit scoring model and type of loan. This means comparing rates from several lenders might not have a compounding negative effect on your score.
Some lenders offer prequalification tools where you can preview potential rates, which may help you compare options while limiting the impact on your credit score.
Does refinancing hurt your credit?
Beyond the initial hard credit check, the actual process of refinancing your old loan with a new one can influence your score in a few ways.
Here are some factors that could impact your credit:
- Length of credit history: Closing your original loan and opening a new one can lower the average age of your credit accounts. A longer credit history generally benefits your score.
- Credit utilization ratio: Refinancing a standard installment loan usually won’t affect this metric. However, consolidating credit card debt with a cash-out refinance or a personal loan might impact credit utilization, which is the amount of credit you use against your total available credit. It may be lowered by paying down existing debts and balances. A credit utilization ratio of 30% or below is generally considered favorable.
- New or recent credit: Adding a new loan to your credit report may temporarily affect your score as it represents new debt.
While these factors might cause an impact initially, the effect is usually temporary.
Will refinancing help your credit?
While there may be a short-term impact, you might wonder whether refinancing can help your credit in the long run. The potential benefits often depend on how you manage the new loan.
If refinancing provides you with a lower monthly payment, it might be easier to make your payments on time. Payment history is a factor in calculating your credit score. Consistently making on-time payments on your new loan could help build your credit over time.
Monitoring your credit health
Even if you aren't worried about negative marks on your credit report, staying aware of your credit score can be a good habit to support your overall financial health. Monitoring your credit with a tool like Chase Credit Journey® may help you keep track of your financial behavior.
Credit Journey® is a free online tool for anyone 18 or older with a valid U.S. address and Social Security number (SSN), offering access to your credit score and personalized score improvement plans provided by ExperianTM—no Chase account required.
The bottom line
While the initial application process might temporarily affect your credit score, refinancing could offer long-term benefits if it helps you manage your debt more effectively. Consistent, on-time payments may be beneficial to maintaining your credit health. It may be helpful to weigh the potential pros and cons before deciding to refinance.
