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Does Refinancing a Personal Loan Hurt Your Credit Score?

December 19, 2023 • 333 views

Refinancing a Personal Loan is an effective financial strategy for managing expenses and saving money on EMIs. However, if you are considering getting a Personal Loan for refinancing, you must also understand its impact on your credit score. 

Read on to know what refinancing is, how it affects your credit score and different tips to minimise its impact.  

What is Refinancing?

Refinancing a Personal Loan entails getting a loan and using it to pay off an existing loan or multiple loans at beneficial terms and conditions (such as a lowered interest rate) of the new lender. It might hurt your credit score momentarily. How? Let’s find out in the next section.

How Does Refinancing Affect Your Credit Score?

When you apply for refinancing, the lender carries out a credit check. The lender will use one inquiry or hard pull to determine your creditworthiness. A single hard inquiry may lower the credit score by a couple of points. But, multiple hard inquiries in a short time can hurt your credit score. Thankfully, you can minimise the effect of refinancing on your credit score, as discussed in the section below.

Also Read - When and How to Refinance Personal Loan

Tips to Minimise the Impact of Refinancing on Credit Score

Plan Your Refinancing Strategy

Evaluate your financial position before opting to refinance a personal loan. If you expect to request other credit soon, like a mortgage or car loan, ensure it does not coincide with the refinancing request.

Pay Your EMIs on Time

One of the best ways to minimise the effect of refinancing on your credit score it to pay the loan EMIs on time. It would help improve your credit history, especially if you start with a low score.

Limit New Credit Applications

Limit applying for new credits before and after refinancing. Each new credit could result in a hard inquiry, impacting your credit score.

Best Practices for Managing Credit During Loan Refinancing

Monitor Your Credit Report

Ensure that you confirm the authenticity of your credit report regularly after refinancing. Inform the credit bureaus about any inconsistencies immediately.

Diversify Your Credit Mix

A mixed portfolio combining credit cards, instalment loans, and mortgages will positively impact your credit profile. However, you must be mindful about opening new credit accounts to avoid adverse effects on your credit score.

Manage Credit Card Balances Wisely

Always pay attention to your credit card balance and keep the utilisation rate to less than 30%. If you hold a high balance on your credit cards compared to your credit limit, your credit score might be affected negatively. In the case of loan refinancing, paying off credit card debt will help your credit score.

Avoid Closing Old Credit Accounts

Closing an old credit account is not advisable since it may damage your credit report. It affects your credit history, which also hurts your credit report score. Keep as many old accounts open as possible for a lengthier credit history.

Also Read - How to Improve Your Credit Score by Online Personal Loan?

To Conclude

Refinancing a personal loan could have a short-term effect on your credit score. To minimise the effects, repay the loan EMIs on time and avoid getting too many loans at a time. Seek advice from financial advisers and credit counsellors before refinancing a loan. They can also help you set your long-term financial goals, ensuring the refinancing corresponds with your financial planning.

Disclaimer

We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Personal Loan disbursal is at the sole discretion of Poonawalla Fincorp.
*Terms and Conditions apply

poonawalla fincorp team

Poonawalla Fincorp Team

We are a team of expert writers and editors passionate about providing our readers with authentic and valuable information on finance. Our aim is to simplify financial and finance-related concepts. We strive to help our readers become more aware and empowered to make informed financial decisions.

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