Does Refinancing Affect Your Credit Score?

Refinancing is the act of paying off a current loan by taking out a new one. You might choose to refinance if you think it’ll help you get a lower monthly rate, or else pay less interest in the long term. Refinancing can be a useful tool for anyone paying off a long-term loan, such as a home, car, or student loan, especially as your financial circumstances change and you find you are able to afford to pay more or less per month. But does refinancing affect your credit score? And if so, does it improve it, or hurt it?

The effect of hard inquiries

Applying for refinance loans, as with applying for any loans, involves creditors running your credit report, creating new “hard inquiries.” These inquiries typically lower your credit score by a few points. Although the effect of one inquiry is negligible, the refinancing process usually leads to several such inquiries.

If you want to minimize the harm that these hard inquiries do to your credit score, there are steps you can take.

Be sure to get all your applications in during a short time period: fourteen to forty-five days. Additionally, keep your inquiries consistent in terms of your requested loan and what kind of companies you are applying to. Some credit score models will consider all inquiries made during a short period of time to be just one inquiry, especially if all the requests seem to be similar. It’s better to apply for twelve credit cards over the course of a month than to apply for six over the course of a year.

The effect of closing accounts

Refinancing involves closing an old account (the old loan, that you are paying off through the refinancing process), and opening a new account (the new loan, which you are taking out in lieu of the old one). Closing your account will not affect your credit score immediately. Since the old account is immediately replaced with a new one, the amount of money made available to you will not change, meaning that your credit will not be jeopardized by your spending ratio.
However, in the long run, it can have an effect because it will likely lower your mean account age. Successfully holding loans for multiple years, while paying regularly, looks a lot more impressive on a credit report than paying money to a loan that you have only had out for a short while. This change will not be immediately noticeable, because closed, paid-off accounts remain in your credit for ten years after being closed. For those ten years you will have the benefits of an old account being factored into your credit. After that time, however, the old account will go away, and your credit will likely drop as a result.

On the plus side

That said, if refinancing a loan looks like a good decision, then it probably is. While your credit score will likely drop, the damage will be slight and clear up over time, especially if you take the proper steps. Additionally, getting a good deal on a loan can help your credit if it puts you in a position where the ratio of your monthly pay to the amount of money you are paying off in loans is good.

The takeaway

It’s never a bad idea to think about your credit and how your actions might affect it. That said, there are other important factors that weigh on your finances, and one of those factors is how much money you are paying in loans. If refinancing is going to help you save money, or if it will make it easier for you to pay off those loans, then it is a worthwhile choice to make.

Strategies for Strengthening Your Business Credit Score

You probably already know that a good personal credit score is an important thing for a person to have. Whether taking out a loan or renting an apartment, more things are possible if you have good credit on your side. But if you are an entrepreneur, it is equally important to have good business credit, independent from your personal credit score.

Why do you need business credit?

If you started your own business, you most likely got it off the ground with your own money. Why, then, should you separate your business and personal finances?

First, it’s more secure. If your business fails, you don’t want that failure to damage your personal credits. And if your business is sued, you don’t want to risk losing your personal assets in court.

Second, having business expresses separate makes it easier for you to make the appropriate tax deductions.

Third, a business can access more credit than a person can: ten to a hundred times more. This is useful for two reasons. First, businesses often need that higher ceiling, because they must work with larger sums of money than the average person. Second, even if your business does not require such sums, more wiggle room is better. Experts recommend that companies try to keep their credit utilization ratio under 30% of the credit made available to them. If more credit is made available, this is naturally easier to do.

How do you improve business credit?

Business credit can be formed and improved in many the same ways as personal credit. This includes obtaining a company credit card, paying bills on time, and staying up-to-date on how your company is scoring.

Like personal credit cards, business credit cards are easy to find and apply for. However, it is important to compare the available choices, and make sure that you are picking the best option for your company. Look for low rates, as well as high spending limits. Again, a limit that seems unnecessarily high will play to your advantage, as staying within 30% of that limit will help your credit in the long run.

As with personal credit, it is unquestionably important to pay bills on time. In addition to avoiding fees, failure to pay in a timely manner will damage your credit. if you are worried about remembering to pay on time, you can set up your account to collect payment automatically.

Lastly, you need to understand how your credit is determined. Credit scores are compiled through credit bureaus. When you go for a loan, or rent a space, or do anything else that requires credit, lenders will receive your score from one of these companies. You don’t know which one—it depends on the lender—and with personal credit, it doesn’t really matter, because personal credit bureaus all do their calculations the same general way. However, unfortunately, business credit bureaus are not so uniform. As a result, different bureaus will come up with different scores. So that you are not caught off-guard, and so that you can update information as need be, keep an eye on your business credit scores according to multiple bureaus, not just one.

In conclusion

Separating your business and personal credit will both benefit your business and protect your personal finances from going under if your business fails. Establishing business credit is similar to establishing personal credit, but note the few differences there are—for instance, the higher ceilings and the less uniform scoring methods. Being aware of how business credit works will help you grow your business in a smart, financially sustainable way.