How Refinancing Affects Your Credit Score, and Vice Versa

Is refinancing hurting your credit score?

Credit hits are pretty much inevitable when you apply for a new credit account, open a loan, or close one. And refinancing your mortgage involves all of these steps.

However, the credit impacts from applying for and opening a refinance loan are very small — often “less than five points,” according to FICO.

The savings you are likely to realize from refinancing should more than offset any negative impact on your credit. So don’t let that be a concern when applying.

Check your eligibility for refinancing (February 6, 2022)

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How Refinancing Affects Your Credit Score

Refinancing can reduce your credit score by just a few points, but it’s unavoidable when shopping for a new loan or credit account.

There are two reasons why refinancing affects your FICO score:

1. Length of credit history – FICO monitors the age of your oldest credit account and your newest account, and averages the ages of the others. So think twice before opening or closing an account, especially credit cards you’ve owned for a long time. Closing your current mortgage may have little impact if it’s only been around for a few years
2. Soft and hard inquiries for new credit – When you check your own credit or have a monitoring service do it on your behalf, it is an “indirect credit check”, which means that your score is not affected. But when you apply for new credit, it’s a “hard credit inquiry” and your score takes a little hit. FICO says that for most borrowers, the hit will likely be “less than five points.” As long as you manage all of your accounts properly once the new one is in place, your score should be back to normal within a few months.

Also note that Experian, one of the big three credit bureaus, says that many credit reporting technologies will continue to consider the payment history of your old mortgage even after it’s closed.

This can minimize the negative effects of closing your old loan. But make sure your current loan is in good standing when you refinance. More on that below.

For the most part, refinancing should have little to no lasting effects on your credit score.

Can refinancing improve your credit score?

In some cases, refinancing your mortgage can actually improve your credit score.

If you’re stuck with an unaffordable home loan and high mortgage payments prevent you from paying off other debts, refinancing into a lower monthly payment could do you a lot of good.

Imagine being able to reduce your monthly mortgage payment by a few hundred dollars through refinancing. Now you can stop making minimum credit card payments and start paying off your debt.

Some homeowners even use cash refinance for debt consolidation.

This involves using the equity in the property to pay off high-interest debts, consolidating them into one low-interest loan payment to save money on interest.

If done right, the positive impact these strategies could have on your score would be far greater than any negative impact of refinancing.

Check your eligibility for refinancing (February 6, 2022)

How Your Credit Score Affects Your Refinance

Your credit score affects your refinance much more than your refinance affects your credit score.

This is because a higher credit score can significantly reduce your mortgage interest rate, while a low score usually means paying a higher rate.

As CNBC says, “As long as your interest rates are high, you’re putting less money into equity and assets and more money into servicing debt. And debt has no return.” on investment.

In short, making smart credit moves and maintaining your score before refinancing can save you a lot of money in the long run.

Credit ratings and refinance rates

How much can you save when you refinance with a high credit score?

FICO has a page on its website that lets you compare mortgage costs based on your credit score. We ran an example scenario using a $200,000 30-year fixed rate mortgage and average mortgage rates as of the day of writing.

Your own results will vary depending on your exact interest rate, loan amount and location. But the general trend is clear: your credit score makes a big difference in your refinancing costs.

FICO score range	Monthly payment	Total interest paid (30 years)
760-850	$803	$88,999
700-759	$826	$97,454
680-699	$845	$104,293
660-679	$869	$112,677
640-659	$916	$129,899
620-639	$979	$152,471

Of course, it’s not just your mortgage that you’ll be paying more for.

Your credit score also affects interest rates on car loans, personal loans, credit cards and other financial products.

So, instead of wondering if a refinance will hurt your credit, you could look at it the other way around: how can a mortgage refinance – or the refinance of other debts at a lower interest rate – actually to help your credit and improve your personal finances?

Check your eligibility for refinancing (February 6, 2022)

Tips for preserving your credit score when you refinance

Smart homeowners compare rates from several different lenders when refinancing. If you want six quotes, does that mean your credit score takes six results?

Luckily, no – getting multiple rate quotes won’t lower your score multiple times. FICO says its score “buys fare.”

But, you have to be smart about how you shop to protect your score – and that means getting all your quotes in a matter of weeks at most.

Comparison store during a targeted period

To protect your credit score when you refinance, you must submit all your rate shopping applications within a targeted period. If you take several months to request quotes, each can be considered a separate in-depth investigation.

For FICO, a “target period” generally means getting your rate quotes within 30 days.

Newer versions of the FICO scoring model allow a 45-day period for fare purchases. But don’t take any risks. Many lenders use older versions of FICO to calculate your score.

So, provided you make all of your rate shopping requests within a single 30-day period, your score should take a single standard hit of around five points or less – like someone not shopping.

Other steps to protect your credit

Experian raises an important point for homeowners refinancing: you need to be absolutely sure that you make every payment on your original mortgage on time.

Especially if you have two mortgages at the same time, it’s easy to not know how much you owe to whom. And, worse, sometimes your new lender may trick you into forgetting your last payment on your existing loan because your new mortgage will pay it off. But don’t do that.

Not all mortgage lenders are models of efficiency. And if your new one is only a day late paying, your credit score will likely be dented by late payment.

How is your credit score made up

We mentioned above that refinancing can impact two credit scoring factors: the length of your credit history and the number of soft and hard inquiries on your credit report.

But what impact do these things really have on your score?

To give you a better picture, here are all the elements that make up your credit score, along with the weight assigned to them in FICO’s scoring model:

• Payment history (35%) – Paying late bills or skipping payments can quickly ruin your credit
• Amounts due (30%) – These are credit card balances rather than your overall debt. Keep all card balances below 30% of their credit limits and you should be fine
• Average age of accounts payable (15%) – The longer the better. But that looks at your current loan. So opening a new account or closing an old one makes your history shorter and your score lower.
• Composition of credit (10%) – This is your combination of “credit cards, retail accounts, installment loans, finance company accounts and mortgages”. You don’t need one of each, but a mix of revolving credit (mostly plastic) and non-revolving credit (installment loans, including those for cars and mortgages) boosts your score quite a bit.
• New credit (10%) – If you apply for many new accounts in a short period of time, you will send a red flag. But if you’re evaluating buying a single new loan, like a refinance, and you get all your quotes within 30 days, you’ll only get one small hit.

So these are the factors that FICO (and other scoring technologies) look at in order of importance. The two areas impacted by refinancing are lower on the scale.

As long as you do it right, refinancing should cause only a small dent in your score – 5 points or less, in most cases.

What are today’s refinance rates?

Refinancing rates are still at historically low levels. But not all lenders offer the same rates. To find the best deal, you will need to shop around with at least 3-5 mortgage lenders.

The good news is that getting multiple refinance rate quotes won’t hurt your credit score.

As long as you get all of your quotes within a few weeks of each other, they count as one request on your credit report. So don’t let credit concerns keep you from shopping around and finding the best rate.

Show me today’s rates (February 6, 2022)