Does Refinancing Affect My Credit Score?

When you apply to refinance a home loan, auto loan, or student loan – that is, to replace your existing loan with another one. When this happens, you may trigger a “hard inquiry” into your credit history. Most people will see a decrease of less than five points in their credit score with these credit checks, according to FICO, which is relatively minor since the full range for FICO scores is 300 to 850.¹

Why the drop? As you apply for a new loan and a hard credit check is done, a lot is going on in the background. Lenders report your application to the credit bureaus. FICO’s and VantageScore’s systems then read your application as an indication that you’re acquiring new debt, a factor that accounts for about 10% of your credit score.² In many cases, this will cause a small and temporary decline in your credit score. However, in a few months – assuming your loan payments are consistently on time – you will typically see your score rebound.

Another aspect of refinancing that may impact your credit score, is that your prior mortgage will also appear as a closed account on your credit report. This could cause a drop in your score as well, at least initially. However, on time payments could positively impact your credit score over time.³

There are other factors to consider that could make a difference in your credit score as well.

Rate shopping:

If you shop around for rates from different lenders and trigger several hard inquiries, FICO’s or VantageScore’s systems could consider this to be a red flag as it may indicate an overreliance on credit. The result could lower your credit score. In some cases, though, the systems don’t factor in multiple credit checks – for instance, if you do all your rate shopping within a shopping period of 14 to 45 days.⁴ Since the size of that window varies depending on the credit scoring model used and in some cases, the type of loan or financing, you may want to consider staying within two weeks to play it safe. And there’s another window to keep in mind: If you’re shopping for a home loan, an auto loan, or a student loan and find a loan within 30 days, FICO might not reflect any of those credit checks in your score.⁵

Credit history:

Some people’s scores could dip more than usual due to a hard inquiry if they have a short credit history or only a few accounts. You may be reassured to know that your old loan usually remains on your credit report for 10 years if it is in good standing. That’s important to note because the length of your credit history accounts for 15% of your FICO score.⁶  

Timing:

Hard inquiries could stay on your FICO credit report for two years, though FICO credit scores only factor in inquiries from the previous 12 months.⁷

In the longer term, refinancing may positively impact your credit score. It depends on the type of refinancing and on how you manage your newly refinanced loan.

Cash-out refinancing:

Cash-out refinancing on a mortgage allows homeowners to access their home’s equity for large expenses like home repairs or college tuition. It involves taking out a new mortgage loan to pay off an existing one and withdrawing the difference in cash. Paying off credit card debt with this money would lower your credit utilization rate, which makes up 30% of your credit score.⁸ That’s because your credit utilization rate is only based on revolving credit, like credit cards and lines of credit, and not on installment credit, such as mortgages.

Managing personal finances:

The goal of refinancing is often to make personal finances more manageable. If refinancing makes your monthly payments more affordable, for example, you have a greater chance of paying in full, on time, every month. Since payment history makes up 35% of your credit score, this can, in theory, make refinancing a path to a higher score.⁹

The best time to refinance a loan is relative to your situation. Consider factors like your credit score, current loan terms, and the length of time you plan to stay in your home or keep your car before deciding if refinancing is the right choice for you.

Keep an eye on the current market conditions so you can get an interest rate significantly lower than what you initially agreed to when making your purchase.

Not all loans can be refinanced in the same way. Each type of loan may have different requirements for refinancing. For example, if you’re looking to refinance a mortgage, you'll need to go through a different process than if you were refinancing a car loan. Take the time to explore your options to ensure you make the right decision.