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.

Tips to Maintain Your Credit Score During the Holidays

credit cards

Most of us aren’t thinking about credit scores during the holiday season. But not paying attention to credit now may result in problems down the road. The following are 5 tips to help you maintain your credit score during the holiday season.

1. Protect Your Credit from Scammers

Credit card fraud is rampant during the holiday season. If a scammer gets any of your personal information they could potentially open new credit card accounts using your name. Once phony accounts have been opened, the late charges will be reported the following month and eventually collections will start in your name. You may not even realize you are a victim of identity theft unless the collection notices come to your address or your credit score drops significantly.

2. Don’t Apply for New Credit Just for the Holidays

Stores will offer plenty of promotions this time of year to get you to spend more money. Opening a new card, however, may cause your credit score to temporarily drop. Whenever you open a new account inquiries are made into your credit, and when that happens your credit score goes down. If you must, make sure to only open one new account. If possible, wait until a few months after the holidays to open any new accounts.

3. Do Ask for a Limit Increase

This may seem counterproductive, but most experts will tell you to never go over 30 percent of your limit. That means if your limit is $1,000, you should never carry more than $300 on the balance. If you do go over that amount your credit score will decrease. If you plan to use your card for several purchases it may be a good idea to ask for an increase. This will give you wiggle room to spend a little more without messing with your credit score.

4. Don’t Over Spend

The previous section was advice on how to be able to spend a little more without ruining your credit score. However, this should be done with caution. Overspending will lead to a larger minimum payment you may have trouble making the next month. Not missing any payments is the cardinal rule for maintaining a good credit score.

5. Don’t Miss a Payment

Missing even one payment can dramatically affect your overall credit score. FICO reports that payment history makes up 35 percent of your overall FICO score.

It’s important to make sure you have enough money set aside after the Christmas holiday to make at least your minimum payment. Finally, if you have more than one card make sure to pay off the one with the highest rates.