Does refinancing hurt your credit?

You might’ve considered refinancing your home loan, which essentially involves paying off your current mortgage with a new mortgage, to save on interest or get access to your home equity.

While refinancing may be enticing, you’ll want to consider the effects it may have on your overall financial situation, including your credit.

How does refinancing affect your credit?

Refinancing your mortgage can affect your credit score in a few ways. Most of these changes to your credit are temporary and shouldn’t have a lasting negative effect on your credit as long as you continue making on-time mortgage payments.

Closing out your old loan

Closing your previous mortgage can affect your credit, depending on the age and amount of your old loan. In general, loans with long, consistent on-time payment histories help boost your credit. With a refinance, you’ll open a new account that doesn’t have a payment history yet, which can cause your credit score to dip while that account ages.

Some of our reviewers have reported particularly significant credit hits when refinancing — like a reviewer from Arizona, who wrote, “I recently refinanced my mortgage, for a lower rate and payment without taking out any funds, and they dropped my credit score 21 points.”

Hard credit inquiries

Hard credit inquiries, which occur when lenders pull your credit report to evaluate your eligibility for refinancing, can generally drop your score up to five points and stay on your credit report for up to two years.

A hard credit inquiry can reduce your score by up to five points in most cases, but filing all your refi applications within a few weeks can help to lump all the inquiries into one single, minor hit to your score.

However, your FICO score only considers credit inquiries from the last 12 months, and your score should recover quickly with continued, responsible credit use. Even within that year, credit inquiries only account for a small portion of your credit score calculation (about 10% of your FICO score), so their impact may not be a big concern compared to the benefits of refinancing.

Also, according to FICO, inquiries made within a 14- to 45-day window are counted as just one inquiry, depending on the credit scoring model used. If you decide on a loan within 30 days of rate-shopping, those inquiries may not even affect your current rates at all.

Refinancing multiple times

There isn’t an absolute limit to how many times you can refinance, but you still want to keep in mind the process's effects on your credit and finances before you make this decision. While many of the effects refinancing has on your credit score are temporary, refinancing multiple times can extend and increase their impact.

Regardless, the cash you pay in closing costs may be an even bigger financial consideration. According to Freddie Mac, closing costs for refinanced mortgages average around $5,000.

You’ll want to consider these expenses along with the potential savings in interest and mortgage payments before you decide to refinance. In some cases, you could recoup the closing costs within a few years just in mortgage payment savings.

Late or missed payments

Refinancing can change the amount you pay each month and how long you’ll need to make payments. While these changes are often positive, it’s important that you stay on top of your payments to avoid hurting your credit. Whether you’re paying off a purchase mortgage or a refi, making just one late payment could have long-term negative effects on your credit.

Payment history accounts for 35% of your FICO score, so your credit could take a big hit if you pay late. Typically, a lender won’t report late payments to the credit bureaus until they’re 30 days past due — if your mortgage payment slipped your mind this month, make sure you contact your lender immediately.

Most lenders offer automatic payments, which means they can deduct your mortgage payment from your bank account each month to help you avoid missing a payment.

How to fix your credit

If you’re worried about refinancing’s impact on your credit, you can work to improve your credit score so you’re back to normal as soon as possible.

A good start is to avoid opening any new lines of credit or applying for other loans until your credit score has recovered. You can still pay down the balances on credit lines you currently have open, though. This should raise your available credit and help boost your credit score.

While it may be tempting to close old accounts you don’t use as often, you may actually want to keep those credit lines open, especially as you rebuild your credit. As previously mentioned, payment history accounts for 35% of your score, and the length of your credit history accounts for another 15%, so keeping your oldest accounts open and active can help increase your score.

You can also ask creditors for an increase to your credit limit, which can improve your credit utilization ratio (about 30% of your credit score depends on the amount you owe compared to your available credit).

Bottom line

Before you refinance, decide if the savings outweigh the costs long term. You might pay $5,000 in closing costs and lose a few points on your credit score for a while, but you could save a considerable amount each month on your new mortgage payment and get access to a sizeable amount of money through your home equity.

Refinancing can cause your credit score to dip slightly, but these negative impacts lessen over time. As long as you’re responsible (make on-time payments, keep your credit utilization low, etc.), your credit score should recover fairly quickly.