With mortgage rates still near historic lows, many Americans who have not refinanced their mortgages are considering refinancing.
So, the question is: How does refinancing impact my credit?
Well, it may be a relief to hear it will impact most people very little.
How credit scores are calculated:
Our credit scores are comprised of five primary categories that measure our creditworthiness.
Payment history accounts for around 35 percent of our overall score and should not be impacted at all by refinancing.
The second category that measures our credit worthiness is the amount we owe. This category composes 30 percent of our credit score. This category should also not be affected by refinancing.
The third category in line is the length of our credit history, which helps us with our financing rate. It is also not impacted by a refinance loan.
The fourth category is recent credit inquiries, which is likely to be the only one possibly impacted.
The last category is the quality mix of our credit types, which is also not impacted.
“If you apply for more credit at the
same time, there is potential damage.”
There is one category that could be affected.
Recent credit inquiries account for up to 10 percent of our overall credit score makeup. Each time we apply for credit and an inquiry is generated into our credit history, we take a small hit to our score.
The reason for this is if the credit rating bureaus see too much activity into our credit history, they equate the increased activity with trouble obtaining credit and subsequently ding us for it.
A refinance loan would not cause a negative impact to your credit by itself. In fact, it could potentially have no impact whatsoever.
On the other hand, if you were to apply to different lenders and apply for credit cards or store cards at the same time, each of those inquiries could add up to a sizable hit to your overall credit score.
The bottom line is a refinance loan does not typically affect your credit in a negative way.
If you cause a cumulative effect by applying for more credit at the same time, there is the potential of some damage being done to your score.
However, even that damage is temporary and will usually drop off within a few months of having no more inquiries.
If you are in a position to take advantage of the historically low interest rates, I say go right ahead. Just be sure you are doing so in a financially responsible way.