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Why Refinancing Temporarily Lowers Your Credit Score
When you refinance a loan you are paying off a current loan while simultaneously opening a new loan. When you close a current loan or line of credit such as a credit card and open a brand new one it affects your score because you are lowering your average age of open accounts which makes up 15% of your overall credit score.
New “Hard Inquiries” on Your Report
The inquiries you receive while searching for the loan can also affect your credit, as hard credit inquiries make up 10% of your score. However, an unknown rule is that credit bureaus have a “rate shopping” window where consumers can have multiple inquiries from various lenders only count as a single hard inquiry. So if you are going to refinance a loan you should apply with lenders within a 2 week period.
Your Credit Score will Rebound
Yes, refinancing any type of loan, such as an auto loan, student loan, or mortgage loan will lower your credit rating. It is only temporary. Your credit will recover relatively quickly as long as you make your payments on time, you can expect your score to completely rebound within six months.
Monitor Your Credit Report and Scores
You should be monitoring your credit and scores if you aren’t already. There are free apps such as Credit Karma and Credit Sesame that allow you to monitor your credit, check your scores, and get notifications when anything on your report changes. And they are completely free.
Request Free Copies of Your Credit Reports
You can request a free copy of your credit report from each of the three major credit bureaus, Equifax, Experian, and TransUnion once per year. You can go to the government website AnnualCreditReport.com
In Conclusion
Refinancing a loan will initially lower your credit rating but may help in the long run by lowering your interest rate, allowing you to pay off the loan more quickly.
When you shop and compare loan offers and interest rates will multiple lenders make sure you do so within the rate shopping window. If you are refinancing a mortgage loan you will get a 30-day rate shopping window. For other types of loans such as auto and personal loans you get 14 days to have as many lenders pull your credit and it only be counted against you as a single inquiry.
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