Can Refinancing a Personal Loan Hurt Your Credit Score?

Refinancing your Personal Loan typically means substituting your current loan with a new loan. The funds from the new loan help settle the old loan, and your monthly payments are directed according to the new arrangement. But does refinancing a loan hurt your credit score? Read on to find out. But first, let’s understand what refinancing is. Scroll down!

What is Refinancing?

When you refinance a loan, you are taking out a new loan to pay off the existing loan or multiple loans. It helps reduce the burden of your current loan. But this may hurt your credit score momentarily. How? Check out the next section to find out.

How Does Refinancing Affect Your Credit Score?

Here are 3 reasons why refinancing a Personal Loan can affect your credit score:

1. Multiple Loan Inquiries

At the time when you decide to refinance your loan, you will probably apply for loans offered by several different lenders to check which one best suits your needs. Submitting your loan application within a shorter period helps you avoid multiple hard inquiries. Most credit scoring models consider inquiries between 15 to 45 days as a single inquiry, which may help you minimise the effect on your credit score. However, applying for loans over a period of several months may have long-lasting negative effects on your credit scores.

2. Credit Check

Applying for any new credit attracts hard inquiries, where lenders check your credit history and credit score. This is also known as a hard inquiry, which can lower your credit score temporarily. However, the money you save on the refinancing loan covers all the negative effects of a minor dip in your credit score. With responsible credit behaviour and making repayments on time, you can improve your credit score over time.

3. Paying Off Your Old Loans

Refinancing your loan results in closing the original account, which can lead to a lower credit score. This may get recorded on your credit report by some credit scoring models. However, if your loan was closed with good standing, it can have a minor effect on your credit score.

Also Read - When and How to Refinance Personal Loan

4 Best Practices for Managing Credit During Loan Refinancing

Here are the 4 best practices for managing credit during loan refinancing:

1. Monitor Your Credit Report

After refinancing, confirm the authenticity of your credit report regularly. Inform the credit bureaus about any inconsistencies immediately.

2. Diversify Your Credit Mix

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

3. 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.

4. 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.

3 Tips to Minimise the Impact of Refinancing on Credit Scores

Here’s how you can minimise the impact of refinancing on your credit score:

1. Plan Your Refinancing

Evaluate your financial position before opting to refinance a Personal Loan. If you expect to request other types of credit soon, like a used car loan, ensure it does not coincide with the refinancing request.

2. Pay Your EMIs on Time

One of the best ways to minimise the effect of refinancing on your credit score is to pay the loan EMIs on time.

3. 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 negatively.

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

To Conclude

Refinancing a Personal Loan could have a negative 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.
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