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Wednesday, September 28, 2022

Does Refinancing Hurt Your Credit?

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With low interest rates, you may be thinking about refinancing your loan. By doing so, you could reduce your monthly payments and/or save interest over the term of the loan. However, refinancing is not only about the interest rate, but also about costs and risks. This is an in-depth analysis of the reasons for refinancing, and the cons you should consider. When customers acquire loans from financial institutions, they have the option of refinancing the debts. Or they can also request refinancing even if they fail to comply with the installments, and they foresee that they will not be able to continue paying the value of future monthly payments. Equity refinance is another way that homeowners approach it, whether they have good credit or not.

Your Payments

If you have acquired any type of credit or loan, there is no excuse to stop paying and go into default, a situation that makes customers incur greater expenses and affects their credit history. Of course, keep in mind that refinancing brings personal relief, but increases the amount of interest you are going to pay, because usually the conditions change according to the interests that are in force in the month in which the entity approaches to do this procedure.

The Risks

So we have established that debt refinancing, the one that a user of the banking system resorts to when he has difficulties paying, can be an obstacle to the healthy management of personal finances and, even worse, affect the credit rating. This is because refinanced loans still generate risk. People who have agreed to a refinancing, it is very possible that in the future they will also have problems paying for their loans. However, every six months, financial institutions review their credit history, so a debtor must pay on time in this period in order to improve their credit rating.

Multiple Applications

If you have multiple credit inquiries, you can consolidate them into one and refinance them as one. Some financial institutions offer a grace period for up to two months, but in this period interest is also generated. When you are refinancing a loan, your credit score could be reduced temporarily. So, that’s a good thing. However, refinancing can affect your credit scores if it changes the loan terms and balance.

When you decide to refinance your loan, it is important to note that the creditor will still check your credit history and score. This may reduce your scores, especially if you apply to multiple lenders. It helps to apply for refinancing within a 45-day period so that multiple credit inquiries do not affect your scores, because this would be counted as one application towards your score calculation. Bear in mind that this will not permanently damage your credit.

Loan Balance and Terms

Loan Balance and Terms

So, it is established that if your balance and terms on your refinanced loan changes in any way, it will affect and hurt your credit. It all depends on the nature of the refinance and the number of credit inquiries. In some cases, it could be a modification, debt reconsolidation or a brand new loan with new terms and new balance. If the lender reports the refinanced loan to the credit bureau as a new loan, it could hurt your credit. The credit bureau sees this as a new loan and therefore, a new financial obligation, which will influence your credit score. If your existing loan was changed in terms and balance, then the credit bureau may lower your score, but not as they would if it were presented as an entirely new loan.

Most people choose refinancing to improve their credit and, of course, pay off their loans much faster. However, there are some factors that consumers should consider when refinancing various types of loans. It does make a difference in the type of loan refinanced and what it does to your credit score.

Conclusion

If you are trying to refinance your mortgage loan with multiple credit inquiries, it can have an effect on your credit and FICO score. Again, to avoid this, apply for refinancing within a window of 14 to 45 days. You can also speak to your lender about your goals and the fact that you are trying not to reduce your score with a refinanced loan. They will work with you. The same is true with refinancing an auto loan and student loan. If you want to become more informed, go to the Goalry website and to their Loanry Store.

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