Does Refinancing Hurt My Credit Score?

By Courtney Christensen on September, 28 2020
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Courtney Christensen

Every once in awhile, there is a nationwide surge in refinancing due to the dips in interest rates. Sometimes, these dips only last a week, and sometimes they can last months. Regardless, when this happens, many homeowners jump at the chance to lower their monthly payment or borrow against their equity. 

Who wouldn’t? Refinancing can help you save hundreds a month, consolidate your high-interest debt, or complete a home project. So, what are the downsides? A question we get all the time at Ruoff is, “Does refinancing hurt my credit score?”

The answer is…maybe. It depends. It’s a vague answer, so here’s an article to hopefully help you understand the details.

Can Refinancing My Home Hurt My Credit?

Short answer – yes, temporarily. When it comes to improving your credit score, time is your best friend. Loads of things can affect your credit temporarily. Pulling your credit report, applying for a credit card, obtaining a loan, etc. None of these things is a permanent black mark against your credit score, and refinancing isn’t either.

Refinancing requires a hard inquiry into your credit report. This docks your credit score for a short while, but this only hurts you in the long run if you pull hard inquiries all the time. Once or twice a year = not a big deal.

When you refinance, you get an entirely new loan. With any new loan, your credit score lowers because you have not yet proven that you can pay this specific loan back in a timely fashion. However, if you regularly pay your bills (all of them) on time, this issue will dissipate pretty quickly.

Finally, and the least of the issues, a new loan reduces the average age of your accounts. Because a refinance replaces your current mortgage, your older account is replaced by the newer one. Older accounts have the benefit of time and stability with payments that newer ones don’t have yet. But, again, this won’t last, and your score won’t take a big hit.

Can I Minimize the Damage?

Absolutely! Before you begin looking into lenders to refinance, download a credit score app to check your score. These apps do a “soft” pull, which means the number is not 100% accurate, but it’s pretty close. Better yet, a soft pull does not affect your credit score.

Most of these apps will give you a review of your credit score and give tips to improve areas where you’re struggling. Our advice: beef up your credit score in your weaker areas so that when you refinance, your credit score won’t dip too low. Plus, the higher your credit score, the better your interest rate will be!

How Does Refinancing Help Me in the Long Term?

We’ve covered how refinancing hurts your credit score, but we haven’t touched on the benefits yet. You will benefit financially – whether you lower your monthly payment or get cash out of your home to complete a big project. Plus, when you refinance, you can change your interest rate. If you refinance at the right time, you will lower your rate and save money regardless of the type of refinance you choose.

Lastly, refinancing ultimately helps your credit score. Remember, I said time is your friend when it comes to your score? If you can prove that you can pay your new monthly mortgage payment on time, every month, your score will steadily grow. Your payment history is the single biggest contributor to your score, so that method will help you most.

Refinancing can ding your credit score temporarily, but the effect won’t last. The best way to figure out whether refinancing your home is a good idea for you is to speak to a loan officer at a qualified mortgage lender. Loan officers will be able to help you decide, based on your current credit score, if you can save money with refinancing without permanently damaging your score.