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Before making an important financial decision, it is important to know how this may affect your credit rating. If you want to refinance, it’s natural to wonder if it might hurt your credit.
As a rule, refinancing won’t affect your credit health much, but the answer isn’t always black and white. Regardless of whether you are considering your options or have already made your choice, below we have described what you need to know about refinancing.
What Is Refinancing?
Refinancing is determined by providing a new loan to repay the remainder of your existing loan balance. How you approach the refinancing decision depends on whether it’s a house, a car, a student loan, or a personal loan. Since refinancing is mainly related to replacing an existing debt obligation with another debt obligation on different terms, this is not a decision that should be taken lightly.
If you are worried about how refinancing will affect your credit health, remember that there are several factors that determine whether it affects your credit score, but three main factors::
1) Have a strong credit rating
You will not be able to agree on the terms of refinancing without a decent loan.
2) Obtaining sufficient income
If you can’t prove that you can track loan payments after refinancing, it won’t be possible.
3) prove sufficient fairness
You will also need to provide a guarantee that payments will still be made if your income cannot cover the costs. When refinancing a house, it is recommended to have at least 20% of the shares in the property.
How Does Refinancing Damage Your Credit?
Refinancing may seem like a good option, but how does refinancing hurt your credit? In short, refinancing can temporarily lower your credit score. Recall that the main lending factors affecting credit ratings are loan applications and changes in balances and credit conditions.
Loan applications
Every time you refinance, lenders conduct a thorough credit survey to check your credit score. Complex loan applications usually lower your credit scores by several points. Try to avoid the occurrence of several new requests by using reasonable shopping tactics. It is also useful to get all your applications within a 14-45-day window.
Keep in mind that loan applications submitted within 14-45 days can be considered a single request when calculating your points, depending on the type of loan and its evaluation model. In any case, your credit will not be permanently damaged, because the impact of a complex investigation on your credit will decrease over time anyway.
Changes in the balance of funds and credit conditions
The extent to which your credit score will be affected by changes in loan balances and terms depends on whether your refinanced loan will be reported to credit bureaus. Lenders can declare it as the same loan with changes or as a brand new loan with a new opening date.
If your refinancing loan is declared a new loan, your credit rating may be more affected. This is because a new or recent opening date usually means that this is a new loan commitment, which has a greater impact on the valuation than if the existing loan terms were simply changed.
How do common types of refinancing affect your loan?
Refinancing can help you pay off your loans faster, which can actually improve your credit. However, when refinancing various types of loans, several factors should be taken into account.