App version: 0.1.0

Does Refinancing Hurt Your Credit?

Editor’s note: At Lantern, we strive to help you make financial decisions with confidence. To do this, we occasionally feature content that includes information about our partners and their products or services. We do not provide, endorse, or guarantee any third-party product, service, information or recommendations—and our opinions are our own.
Brian O'Connell

Brian O'Connell

Updated August 6, 2021
Share this article:
Does Refinancing Hurt Your Credit?; When you refinance, it's not uncommon to see a small, temporary dip in your credit score. Learn about why this happens from Lantern by SoFi today.
Sometimes, after you’ve taken out a loan, you may decide that you can do better with a new loan. You may see a lower interest rate or your credit score may have improved so that you qualify for better loans. In either case, if you want to switch to a loan with better terms that may cost you less than your current loan, you may be looking at what’s called a loan refinancing or refi.Refinancing is the term used when you take on a new loan to pay off an old one. You can do it with personal loans and auto loans, but one of the most popular types of refi is the mortgage refinance, which is likely the most expensive one of all.But can refinancing potentially lower your credit score?The answer is yes, in some cases, credit scores can slide downward when a borrower refinances a loan.But how steep is that slide and what can borrowers do to minimize a credit score hit when refinancing a loan?It’s a good idea to investigate those realities and see how your credit may be impacted by a refinancing before you sign on the dotted line. 

The Link Between Refinancing and Credit Score

Mortgage refinancing continues to be a growing consumer trend in 2021. That’s likely because low interest rates are offering homeowners good opportunities to cut their mortgage rates and save some significant cash in the process.According to Black Knight’s Mortgage Monitor Report, approximately 2.8 million US homeowners refinanced their home mortgages in the fourth quarter of 2020, with a total of $869 billion in refinance lending.Of course, any time interest rates are low—or your credit rating has improved—you may be tempted to shop around, whether it’s for a new mortgage, auto loan refinancing, or a personal loan refi. What many refinancers may not realize, however, is that refinancing a loan will likely impact your credit score. That’s due to the fact that credit scores are tightly bound to consumer loans. The credit impact likely won’t be substantial when you’re taking out a mortgage refinancing loan, and that’s true for smaller loans as well. Refis usually involve just a short-term decline. But knowing all the potential credit score risks and realities is a good idea as you’re planning your financial decisions. 

Ways Refinancing Can Hurt Your Credit Score

Refinancing can temporarily lower your credit score in several ways.

Hard Inquiries

A hard inquiry, also known as a hard pull, is a common tool used by lenders and creditors to gauge a potential borrower’s credit health.After a potential borrower files a loan or credit application, the lender reviews the would-be borrower’s credit in what’s called a hard inquiry. Hard credit checks have to be authorized by the borrower, though many may not be aware of it. Lenders typically require the credit check authorization as a “must do” if the application for credit is to be accepted.Typically, a single hard credit pull won’t inflict too much damage on a borrower’s credit report. In most cases, the borrower’s credit is dinged by no more than five credit score points.If, however, the borrower files multiple applications over, say, several months, credit scoring agencies may view that as a negative factor and cut a borrower’s credit score by 10 points or more. Note that the FICO® score algorithm will not count mortgage and auto loan hard pulls for the past 30 days when figuring out your score—and won’t hold them against you at all if you end up taking out a loan. What’s more, if there are multiple inquiries for the same kind of loan within a short period (14 days in older FICO score models, 45 days in more recent ones), they will be counted as one hard credit pull. That can allow borrowers to shop around for the best rate on, for example, a personal loan.  

New Credit

How much new credit you’ve taken out may account for 10% of your credit score, according to most credit scoring formulas. Lenders tend to be more wary of potential borrowers with a recent history of aggressively taking on new debt. That’s relevant for a refi because, put simply, older loans are better than new loans. That’s another reason why refinancing may trigger a credit score decline. Let’s look at the reasoning a little more closely.

The Old Loan

When you refinance a mortgage loan, say, you’re basically switching out your old home loan for a new one. The old home loan has significant value for your credit score, however. Consider a $300,000 home loan on which you’ve paid off $150,000. That’s viewed by credit scoring agencies as a big plus when they’re formulating your credit score. On the one hand, $150,000 is a significant outstanding debt. But on the other, having taken on a loan of $300,000 and paid off half suggests creditworthiness

The New Loan

When you refinance that mortgage loan, your new loan of $150,000 includes only the $150,000 you haven’t paid off. Sure, the goal is to pay the whole loan off, but in the eyes of credit scoring firms, you’ve traded an old loan that’s 50% paid off for a new loan that is 0% paid off.That’s why that trade-off may set off some credit formula alarms and will likely result in an immediate decline in your credit score–even though your new loan holds the same “amount due” as the old loan.

Your Credit Score After a Refinancing Loan

If you have a good history of handling debt and making on-time payments, rebounding your credit history after a small refi drop in your credit score should be fairly doable.These steps may help you maintain and rebuild your credit history.

Don’t Pause Payments on Your Old Loan During the Process

Sometimes refinancing homeowners will stop making payments on their old mortgage loan before the deal is closed. That’s a mistake. The old mortgage loan must be paid down right up to the refinancing loan closing. Any missed payments will be reported to credit scoring agencies, with a potentially significant credit score curb to follow. And the same advice applies to other types of loan refinances, too. 

Make New Loan Payments on Time

During a refinancing process, there may be some confusion about when the old loan payments can stop and the new loan has to start being paid. Be sure you understand the time frame and keep making those on-time payments.

Stay Away from Big Loans for a While

Since credit scoring formulas rely so heavily on total debt amount and new debts, it’s a good idea to take six months to a year off from taking on any large new debts, like personal loans.That may be disappointing if you’ve saved so much on a robust mortgage refinancing deal that you’d started looking at the pros and cons of an auto loan to buy a new car. But try to hold off on that new set of wheels for a while.

The Takeaway

Refinancing a major loan can certainly affect your credit in the short run. But the benefits of refinancing can include getting a lower interest rate and reducing your monthly payments, which may outweigh any temporary downsides for your credit score.Just know going into a refinancing deal that chances are high your credit score might take at least a temporary hit. The good news? You can generally take steps to rebuild any slight damage to your credit history, like being sure to make all your payments on time and paying down other debt as soon as you can.As you’re looking for refinancing loans, it’s always good to shop around. Filling out one form at Lantern by SoFi can give you access to multiple loan offers from our network of lenders so you can pick the option you think is best for you.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC0521082

Frequently Asked Questions

Can refinancing affect your credit?
Does refinancing a car hurt your credit?
Why did my credit drop after refinancing?
Does refinancing start your loan over?
What is the downside to refinancing?

About the Author

Brian O'Connell

Brian O'Connell

Brian O’Connell is a freelance writer based in Bucks County, Penn. A former Wall Street trader, he is the author of the books CNBC's Creating Wealth and The Career Survival Guide. His work has appeared in multiple media platforms, including TheStreet.com, Bloomberg, CBS News, Yahoo Finance, and U.S. News & World Report.
Share this article: