When you want to lower payments or improve your interest rate, refinancing can be a great option. Whether it's a car loan or a mortgage, refinancing can save you money.
Before you apply for a refinance, you may want to know if refinancing will hurt your credit. Here's what you need to know:
Refinancing Requires a Credit Pull
Like any loan, when you apply for a refinance, the lender will need to pull your credit. This is typically a hard credit inquiry, which means that it could lower your credit score. This credit decrease is typically less than 5 points for most people, according to FICO.
Applying with Multiple Lender Could Mean Multiple Credit Pulls
If you are applying for a refinance with more than one lender, this could lead to multiple hard pulls. Each of those pulls has the potential to impact your score, so keep that in mind when you are comparing lenders and considering where to apply.
However, when you're shopping for a new loan, the multiple inquiries are typically counted as one inquiry if they occur within a given period of time. This time period varies, but it's usually between 14 to 45 days. So if you are choosing between lenders, you should have some time to make a decision without worrying about multiple credit pulls.
Refinancing Means Closing an Account
When you refinance a loan, it really means closing your existing loan and starting a new loan under the new terms. Closing an account can sometimes lead to a drop in your credit score, depending on the size and age of the account.
Remember, making on-time payments with your new account can help increase your score, so refinancing shouldn’t hurt your score in the long run.
Is Refinancing Worth It?
Though refinancing a loan might lead to a minor drop in your credit score, it could also lead to major savings over time. Here are some reasons to consider refinancing a loan:
- If your interest rate is higher than it needs to be
- If your credit score has improved since you got your car loan
- If you need to reduce your monthly payments
- If you want a better lender
Another thing to keep in mind is that credit inquiries usually only remain on your credit report for two years, so they rarely have long-term impact. Plus, making timely payments on your new loan can help. But most importantly, refinancing a high interest rate loan for a better rate can have a serious impact on your long-term finances.
If you have questions about whether or not refinancing is the right choice for you, talk to your financial institution to learn more about your options. You can also watch this video to learn more: