The impact of refinancing on credit scores

By: on 2013-09-04
Ask Joy Mali

Your credit score may be one of the most important aspects of your financial health. It is very important to maintain a good credit score because that is on what lenders base their decisions regarding interest rates on loans. In addition, credit scores are also now being used as a basis forinsurance rates, and whether or not you are qualified for a job.

Credit plays a very important role in your financial life. While most people are aware of some factors affecting credit scores--such as not repaying debts and that missing payments can be detrimental to their credit--only a few really understand the affect of refinancing on credit their scores.

When mortgage rates are lower, many homeowners decide to apply for refinancing. Of course, this is a good idea, as it may result in lower interest rates and lower monthly payments. If you are wondering, “Will refinancing affect my credit score?” The answer is, “Yes,” but the good news is the impact is not all negative. When you are shopping for a new loan or mortgage, lenders may conduct credit checks which are considered hard inquiries. These hard inquiries can hurt your score and bring it down a few points.

However, when you apply for a loan and a lender pulls your credit report, there is a certain period of time in which lenders can continue to conduct hard inquiries and it will be considered as a single pull. One way to minimize the effects of these inquiries is to shop and apply for new loans within a short period of time.

Another thing to watch out for is a missed payment. Usually, when homeowners are approved for a new loan, the new lender informs the homeowners they can skip the mortgage payment for the current month because the new loan will take care of it. While this is true, sometimes, the loan does not close and the funds do not arrive on time. If the new lender’s payment arrives more than 30 days after your payment to your previous lender was due, your previous lender may consider it as a late payment and report it to the credit bureaus, which could hurt and bring your score down. So when you are approved for a loan, discuss this with your new lender and set some goals. If you are nearing the due date and your new lender still hasn’t made the payment, make sure to talk to them about making the mortgage payment so that your credit score remains unaffected. When everything goes smoothly and your new lender makes the payment on time, the old loan will show up in your report as fully paid. Once the refinancing has been completed, make an effort to maintain good credit and a positive credit history. To do this, you need to keep track of your monthly mortgage payments and pay them on time and in full. To avoid forgetting and to avoid missing out on payments, one quick fix is to ask your bank for an automatic transfer from your account to your lender’s account. In this way, you will never have to worry about missing or making a late payment. It’s also a good idea to monitor your credit report on a regular basis to make sure everything is being reported correctly, and to check your progress.

In addition to making timely payments after you successfully refinance your mortgage, you should also do your best to free yourself from unsecured debt. While home mortgages are not considered as a negative item on your credit report because it is considered as secured debt, unsecured debts are a negative. So if you have credit card balances and outstanding billing statements, pay them off to see an improvement in your credit score. Any negative items that might have resulted from your mortgage refinancing may be offset once you start paying off your unsecured debt.

When mortgage rates are lower, refinancing can be a smart financial move. Once approved, you will be able to enjoy lower interest rates and lower monthly mortgage payments. Keep in mind though, that while shopping for a mortgage loan may have an effect on your credit score, the mortgage refinance should not have any devastating effects.

Last Updated on: Wed, 4 Sep 2013

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