Refinancing And Its Effect On Your Credit Score

Whether you have the plan to purchase a new car for your family, want to expand your business, or move into a new apartment, getting loans helps us to deal with all the cash shortfalls. But even if loans are widely available, it is necessary to be cautious while depending on debts. Usually, debts are repaid in monthly EMIs that include both principal and interest components. And even a small reduction in the loan EMI can significantly reduce the overall loan burden. This is where you can consider loan refinancing. But before considering loan refinancing, it is important to be aware of its potential effects. In this blog, we will talk about how loan refinancing can affect your credit score.

But before that, let’s have some information about loan refinansavimas and how it helps:

When it comes to refinancing an existing loan, you have to take a new one for paying off the existing one. So, the main goal of refinancing is to reduce the burden of the present mortgage. Usually, when borrowers find some better rates elsewhere, they switch the existing loans to new lenders. And then the new lenders pay off the total outstanding amounts to the old lenders and the borrowers can repay their loans to the new lenders.

But now the question is how does refinancing affect your credit score?

Yes, refinancing affects your credit score. The higher the credit score, the lower interest rates you will be able to avail yourself of. So, it is important to check your present credit score before you consider refinancing. When your interest rates decrease, the total burden of the loan will also decrease. And every time, you would place a request for a credit score from any credit bureau, it will result in a soft inquiry. But this will not have any impact on your credit score.

But every time any third party or the lender requests the credit score, this will result in a hard inquiry. And these inquiries would have an impact on your credit score. And it would take a minor hit. This is the reason why financial advisors often recommend borrowers do not approach multiple lenders all at once.

Your credit score will also take a hit when you refinance the existing loans. Yes, it would sound counterintuitive, but refinancing takes a big toll on your credit score. But if you repay the loans on time, your credit score would improve. But missed EMIs or delayed repayments would reduce the score.

 

How long it takes for the credit score to recover after refinancing?

 

It is often disheartening to see your credit score drop after refinancing. But, there is nothing to worry about as this kind of drop is temporary. It would take one to two years for the credit score to recover from the effect. And you can speed up this process by repaying the loan EMIs on time and strengthening the track records of repayment. But keep in mind that the situation often varies from one borrower to another.