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How To Refinance Without Hurting Your Credit Score

To refinance or not to refinance, is the question many homeowners ask themselves every day. This decision can be tough to make when you consider the long-term impact it could have on your credit score, which lenders use to determine whether or not you’re worthy of the loan you’re applying for (and what interest rate you’ll get). On the other hand, if you choose not to refinance, you may be missing out on thousands of dollars in savings each year on your home loans and lines of credit.
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Understand What Can Happen If You Don’t Take Action

Before you refinance, consider what happens if you don’t. If you continue making payments on your current loan, then your debt will not be improving; on top of that, you’ll likely be paying a higher interest rate than you need to. In other words, no progress will be made toward either goal (debt repayment or home equity) and your monthly payment would likely increase over time. To make sure it doesn’t come down to picking one or another—and ultimately hurting both—you should refinance as soon as possible and work with a professional who can guide you through a process that won’t negatively impact your credit score.

Refinancing Actions You Can Take Today

Before you refinance, you should check your credit score and determine how long it’s been since you checked. If it’s been less than six months, don’t do anything until after your next credit-score update. Checking your score frequently—every three months or so—is preferable if you want to make sure your score is continually in good shape. And if it isn’t? It may be time for some damage control with a good service such as Lending Club or Credit Karma. These services can help you monitor your score and flag any issues that need attention. They can also give you advice about how to fix those issues.

Three Suggestions For Maintaining A Good Credit Score During The Refinance Process

  1. Follow your lender’s guidance – Lenders have an incentive to keep your score high because it reduces their risk and helps them get paid faster. If they tell you how and when you should pay off loans or make payments on accounts that aren’t being closed as part of your refinance, follow their instructions.
  2. Don’t close credit cards unless necessary – Closing credit cards may reduce your score by a small amount, but not closing them could hurt it even more—remember those known unknowns? You can lower the average age of your accounts by regularly charging purchases, then paying them off in full every month, for example.
  3. Keep using your old account(s) – It might seem counterintuitive, but if you’re able to maintain at least one account with a balance after refinancing, it will help preserve your score. As long as you continue making payments on time and keeping balances low (ideally less than 30% of your available credit), lenders won’t see any reason to ding you for having too much available credit.

Finding An Approved Lender

You’ve decided it’s time to refinance your mortgage—well done! But now you need to make sure you can get an approved lender. Of course, you want a good interest rate, but there are other factors at play as well. Think about your overall financial situation before searching for lenders. For example, you may not want a long-term commitment or additional debt on top of what you already have on a home equity line of credit (HELOC). Be clear with yourself and discuss things with your lender so that he or she knows what direction you are headed in.

Getting The Best Rate Possible

Keep in mind that lowering your rate or fees is only one step in getting your credit score up. You’ll also want to pay off any high-interest debt, stick with all of your bills on time, and don’t open too many new accounts. High utilization rates (exceeding 30% of total credit lines) can affect scores. If you have a lot of available credit, you might consider closing unused accounts or moving existing balances to lower-interest cards. However, keep in mind that closing an account can potentially reduce your overall credit limit—and lower your score even more!
If you’re approved for a balance transfer card, move your current balance to it before doing anything else. That way, if something goes wrong with your application process or if you’re denied for some reason, at least there will be no negative impact on your credit score. A balance transfer card may offer 0% interest for 12 months or longer; by using it to consolidate higher-interest debts into one low monthly payment, you could save hundreds of dollars per month over those 12 months alone.

Assess What Refinancing Can Do For You Now And In The Future

While it’s a relatively simple process, refinancing is still an important one. You may be able to lower your monthly payments and ultimately save money on interest if you can refinance at a lower rate than what you currently have. Although refinancing can provide immediate savings, it won’t help you if you get in over your head financially or need to make drastic cuts in your spending; nor will it do much for your credit score.
Always look at all angles before deciding whether or not refinancing is right for you. The more information you have, the better decision you can make for yourself and your family (if applicable). If you decide that refinancing is right for you, remember that there are many options out there—don’t just choose whatever comes first! Be diligent about shopping around so that you can find a lender who meets your needs while also helping to improve your financial future.


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