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The Unexpected Credit Score Drops After Refinancing

by | Sep 8, 2023 | News

When it comes to refinancing your mortgage, it can be a wise financial decision that helps you save money on your monthly payments or pay off your loan quicker. However, there’s something unexpected that many homeowners don’t realize – refinancing can temporarily lower their credit score. In this article, we’ll delve into why your credit score might decrease after refinancing, how much of an impact it can have and what steps you can take to minimize its effects.

Understanding the Decrease in Credit Score

1. Credit Inquiries:
When you apply for mortgage refinancing, the lender will conduct a thorough credit check to assess your creditworthiness. This process may cause a slight dip in your credit score. Multiple credit checks within a short period of time, such as when shopping around for the best refinancing rates, can collectively have a negative impact on your score.

2. Closing Old Accounts:
Refinancing usually involves closing down your existing mortgage account and opening a new one. The closure of an old account has the potential to affect your credit score, especially if it was one of your oldest accounts. The length of your credit history is taken into consideration when calculating your credit score. Therefore, closing an older account may shorten that history.

3. Credit Usage:
Your credit utilization ratio, which compares the amount of credit you are using to your credit limit, plays a significant role in determining your credit score. When you replace your existing mortgage with a new one, your credit utilization ratio may temporarily increase as the calculation takes into account the new mortgage balance. As a result, this temporary increase can lead to a decrease in your credit score.

Reducing the Impact

1. Shop Wisely:
While it is important to compare refinancing rates and terms to secure the best possible deal, try to limit your rate shopping within a relatively short timeframe, such as 30 days. Credit scoring models often consider multiple inquiries for the same type of credit as a single inquiry if they occur within a specific window. This approach can help minimize any negative impact on your score.

2. Maintain Other Credit Accounts:
Ensure that you keep your other credit accounts in good standing. Continue making on-time payments towards your credit cards, loans and other debts. This will help counteract any potential negative effects on your credit score resulting from refinancing.

3. Practice Patience:
It is essential to remember that drops in credit scores due to refinancing are typically temporary. By consistently making on-time payments and maintaining positive credit history, you should gradually see an improvement in your score over time.

4. Discuss The Impact With Your Lender:
Consider having a discussion with your lender before deciding to refinance your mortgage. It’s important to understand how it might affect your credit score and seek their guidance on minimizing any potential drop. This will help you make informed decisions throughout the refinancing process.

The Bottom Line

Refinancing your mortgage can offer several financial advantages, including lower monthly payments and reduced interest costs. Although there might be a temporary decrease in your credit score due to factors like credit inquiries, closing old accounts or changes in credit utilization, it shouldn’t discourage you from pursuing refinancing if it aligns with your financial goals. By being aware of the possible impact and taking measures to lessen it, you can enjoy the long-term benefits of a more manageable mortgage while safeguarding your overall credit health. Remember that responsible financial management and maintaining a positive credit history are crucial for maintaining a strong credit score in the future.