Refinancing your debt: Does it hurt your credit?

When we apply for a loan, we must consider all possible scenarios that might happen in the near future.

At this moment, you might be able to pay for the installments without any problem, but that can change if an emergency happens.

In this case, the best way to proceed is by refinancing your debt. Of course, there are other scenarios where debt refinancing is also a solution for a problem.

Nonetheless, there’s a particular issue that many users encounter when refinancing: does refinancing hurt your credit?

Well, the short answer is yes, it does.

Still, there are different types of loans that must be considered to understand how the refinancing might actually damage your credit score.

Today, after reading this blog post, you will know:

• • Why your credit score is an essential factor.
  • Refinancing a mortgage, auto loan, or personal loan.
  • How to proceed after refinancing debt.

Taking care of your credit score is not optional. We never know when we will request a loan.

Besides, having a healthy credit score will undoubtedly help us accelerate any loan process we participate in.

If you are young, it is normal not to fully understand why the credit score is so important.

In fact, we can safely say that the credit score is more than just a number: it is a guide for lenders to understand if they can lend money to you (or not.)

So, knowing this, would you still risk having a good credit score? We bet you wouldn’t.

Therefore, let’s understand how refinancing can be bad for your credit score in the long haul.

Since we will be talking about refinancing loans, we can’t skip the term “hard inquiry.”

A hard inquiry is the process of a lender checking your credit in response to an application for a new line of credit.

If someone is seeking new credit sources, there’s enormous potential for new debt and, therefore, a more significant risk.

As a consequence, when a lender performs a hard inquiry, the user’s credit score will be temporarily lowered to “warn” the other lenders that he or she is looking for new loans.

This is not necessarily bad, but it’s a process that must be performed in order to guarantee the safety of the loan agreements.

One of the reasons why people refinance loans is to simply get a new loan with lower interest rates or lower monthly payments.

This is an option that must be explored if we want to have more cash for our living expenses or for whatever we want. As we mentioned above, there are situations in life when we simply don’t have enough money to cover all the things we need.

Hence, if you are thinking about refinancing your debt, first consider this:

• • Your credit will be checked: when you apply to refinance any kind of loan, your credit will be checked, and the lenders will perform a hard inquiry on your credit report.
    The result of this inquiry will be that your credit score will temporarily decrease. Either way, if you manage to pay your new loan on time, then you don’t need to worry about hard inquiries.

• • An account will be closed: when you refinance a loan, a credit account will be closed.
    Even if the mentioned account were closed in good standing, your credit score would decrease while the debt is not fully repaid.

• • You’ll probably be applying to several lenders: it is not a secret to anyone that most people apply to lots of lenders before refinancing a loan.
    The more you apply, the more hard inquiries will be performed on your credit report. Of course, you need to find the best deal for you but think about this before proceeding.

Refinancing a personal loan

If interest rates dropped since you first got the loan, you might have been thinking about refinancing.

In this case, the refinancing will certainly cause a temporary decrease in your credit score. This happens due to the multiple hard inquiries, so, as we already know, if you pay your debt back on time, you should not worry in the future!

Refinancing a mortgage

First, you need to get your new mortgage approved. After the process is finally completed, you need to check which payments of the old loan are covered by the new mortgage loan.

It is always the borrower’s responsibility to fully pay on time all the installments in order to take care of their credit score as they should.

Refinancing an auto loan

The reasons to refinance an auto loan are very similar to the one when we want to refinance a personal loan.

For instance, if your interest rates dropped, it is actually a good idea to refinance your auto loan in order to lower monthly loan payments.

Be careful – do the math and research if the new interest rates are beneficial to you. Else, you will be affecting your credit score for nothing!

Well, there’s something clear about refinancing loans: the credit score decline is temporary unless you fail to pay back on time.

Hard inquiries are necessary to refinance debt. Basically, when you ask an institution to refinance a loan, they need to prove your ability to repay it – just as when you apply for a new loan.

It’s a process that involves risk for financial institutions. After a few months, your credit score should look as good as it was before the refinancing.

In theory, you can also prove to lenders that you are able to handle even more loans and credit lines. This will likely result in your credit score increasing more than ever before.

Still, keep in mind to consider the type of loan you want to refinance. It’s not the same refinancing a mortgage as refinancing a typical personal loan.

Hence, try to be one step ahead to protect your credit score at all times.