The answer to this question is not a simple one, as it depends on several factors. However, in most cases, refinancing a personal loan does not have a significant negative impact on your credit score.
To understand the impact of refinancing on your credit score, it’s important to review what refinancing is. Refinancing is the process of taking out a new loan to pay off an existing loan. The new loan usually has improved factors such as a lower interest rate and or a longer repayment term. Refinancing can help you save money on interest, lower your monthly payments or both.
Now let’s explore how refinancing a personal loan can impact your credit score.
- Hard inquiries
When you apply to refinance a loan, the lender will perform a credit check to evaluate your creditworthiness. This could temporarily lower your credit score by a few points. However, the impact is usually minimal and disappears within a few months. - Closing the old account
When you refinance a personal loan, you’re essentially paying off the old loan with a new one. This means that the old account will be closed, which can have a small negative impact on your credit score. Closing an account can reduce the average age of your credit accounts and decrease your credit utilization ratio. However, the impact is usually small and fades over time. - New credit utilization ratio
Your credit utilization ratio is the amount of credit you’re using compared to the total amount of credit available to you. When you take out a new loan, you’re increasing your total credit available, which can lower your credit utilization ratio. A lower credit utilization ratio can have a positive impact on your credit score. However, if you use the new credit to accumulate more debt, your credit utilization ratio could increase, which could hurt your credit score. - Payment history
Your payment history is one of the most critical factors in determining your credit score. When you refinance a personal loan, you’re essentially starting a new payment cycle. It’s important to make your payments on time to avoid any negative impact on your credit score. Late payments or missed payments can have a significant negative impact on your credit score.
In conclusion, refinancing a personal loan does not have a significant negative impact on your credit score. In fact, it can even have a positive impact by reducing your credit utilization ratio and lowering your interest rate. Refinancing a personal loan can be a smart financial decision if done correctly. It can help you save money on interest, lower your monthly payments, and improve your credit score in some cases. However, it’s essential to do your research, understand the potential impact on your credit score, and make an informed decision that aligns with your financial goals.
