American Marconi Wireless News - How Does Refinancing a Personal Loan Affect Your Credit Score?

While refinancing should offer benefits like a lower interest rate or better repayment terms, it also involves some credit score considerations. So, let's explore how refinancing a personal loan could affect your credit score and what you can do to minimize any impact on it.

What is a credit score?

A credit score is a three-digit number, usually ranging from 300 to 850, that represents your creditworthiness to potential lenders and how likely you are to repay borrowed money on time. Typically, the higher the number, the stronger your credit score.

Lenders look at your credit score to help decide if they should approve you for a new loan or credit card account. Your score can also affect the interest rate they charge you and other terms of any loan or line of credit you qualify for.

Can refinancing a personal loan affect your credit score?

Can you refinance a personal loan without impacting your credit score? Generally, no - although the effect might not be as drastic as you think. Whenever you apply to refinance debt, the lender will do a credit check to assess your creditworthiness. This credit inquiry, which is called a hard inquiry, may cause a dip in your score, but it's typically small and temporary.

When you close out the old loan and open a new one, this impacts your credit score, too. However, as you continue making on-time payments on your new loan, your credit score could bounce back and even improve over time.

How can refinancing affect your credit score?

Your credit score is determined by several factors, including your payment history, credit utilization ratio, the length of your credit history, the types of credit accounts you have and the number and frequency of new credit inquiries. Let's break down how each of these might be affected by refinancing.

1. Payment history

This is the most important factor in your credit score. If you've been consistent with your personal loan and other payments, you've been building a positive payment history. When you refinance, you start a new loan and as long as you continue making on-time payments, your payment history should remain consistent.

2. Credit Inquiries

Every time you apply for a new loan or other form of credit, the lender will submit a hard inquiry on your credit report. Hard inquiries could lower your credit score by a few points, but it's usually temporary. Most credit scoring models treat multiple inquiries for the same type of loan within a short timeframe as a single inquiry, so try to shop around within a short period if you're comparing multiple lenders.

3. Length of credit history

Refinancing a personal loan could affect the average age of your credit accounts. A new loan will show up as a recent account, potentially lowering the average age of your credit history. Likewise, closing an old loan account will also lower the average age of your history.

4. Types of credit

Lenders like to see a mix of different types of credit, such as credit cards, auto loans and personal loans. If you refinance a personal loan, and you're still maintaining a good credit mix, that could be a good thing for your credit score.

How refinancing affects your DTI

In addition to your credit score, refinancing a personal loan can affect another factor many lenders consider: your debt-to-income ratio (DTI). Your DTI is the total of your monthly debt payments divided by your gross monthly income. A high number may suggest you're carrying more debt than you can handle. Lenders may use this number to help them assess how well you can afford the monthly payments for any money you plan to borrow. Lowering your interest rate or getting a more manageable payment through refinancing could improve your DTI, making you look like a more responsible borrower.

Refinancing a personal loan makes sense for many people. By diligently staying on top of your payments and using other types of credit responsibly, you may be able to reduce the long-term impact on your credit score.

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SOURCE: OneMain Financial

View the original press release on ACCESS Newswire

A.Jones--AMWN