Does Refinancing Affect Credit Score?
Yes, refinancing can affect your credit score. Refinancing can lower your credit score, but any drop will be short and minor. Once you start paying off your new loan on time, your credit score will improve. Let’s find out how refinancing can improve your credit score.
How Refinancing Can Improve Your Credit Score
Refinancing can be used to get your finances back on track, especially if you are consolidating debt. Debt consolidation is rolling your other loans into your home loan account. If you struggle to keep up with upcoming payments from multiple debt accounts, you can roll them into one.
How Refinancing To Consolidate Debt Saves Money
You can refinance your home loan to consolidate debts into one account at a lower interest rate. For example, before debt consolidation, these were the repayments one homeowner had to make each month:
| Debt Type | Interest Rate | Amount Owed | Monthly Repayment Amount |
|---|---|---|---|
| Home Loan | 3.5% | $300,000 | $1,347 |
| Car Loan | 5% | $30,000 | $566 |
| Credit Card | 16% | $5,000 | $102 |
| Personal Loan | 5.45% | $12,000 | $229 |
| Total | – | $347,000 | $2,244 |
The total repayment every month before debt consolidation was $2,244. After debt consolidation, all these payments were rolled into one mortgage.
| Debt Type | Interest Rate | Amount Owed | Monthly Repayment Amount |
|---|---|---|---|
| Home Loan (with consolidated debts) | 3.5% | $347,000 | $1,558 |
The monthly repayment is now $1,558. The homeowner saves $686 each month after debt consolidation. The money you save with the lower interest rate can be used to make extra home loan repayments. You can use our extra repayment calculator to find out how much you save by making extra repayments. Be sure you refinance with a loan that does not penalise you for extra repayments if you want to use this option.
Tip: It’s not always a good idea to automatically turn to the lender who did your first home loan to refinance. Other lenders can provide a much better interest rate.
How Refinancing To Consolidate Debt Improves Credit
When you consolidate your debts into one account, your credit report will show only one home loan instead of several small debts. This looks good to a lender, as you only need to pay off one account. By refinancing to consolidate debt:
- You only need to keep track of one regular payment
- You do not have to pay different fees for different accounts and loans
- You do not need to keep track of multiple pending payments.
- You save money, as your home loan interest rate is lower.
Tip: After you refinance and start repaying your loan on time, it will slowly improve your credit score. A minimum of six months of perfect repayments is considered good. Lenders can see up to two years of repayments on your credit file, including for debts that are closed.
Can I Get A Home Loan If I Have Bad Credit?
Yes, you can. In most cases, it’s a two-step process. The first step is to apply with a specialist lender who will approve your home loan application. Once your credit score improves, the second step is to refinance to the cheapest lender possible. Choosing the right lender and home loan from the onset is essential. Take the help of professionals, like the mortgage brokers at Home Loan Experts. Call us on 1300 889 743 or fill in our no-obligation assessment form today.
Why Does My Credit Score Drop After Refinance?
There is a small, short-term dip in your credit score when you refinance, as it:
- Adds hard enquiries to your credit report: Since refinancing means you’re submitting a new loan, lenders will do their due diligence (even if you’re already their customer) to make sure you can repay the new loan. A hard enquiry temporarily lowers your credit score.
- Shortens credit history: Since you close your old account when you refinance, the credit history of that account drops off your credit report as well. Make sure you have a significant credit history before you refinance. Of course, a credit history of late and missed payments is better cleared up before applying.
- Impacts repayment history: Payment history is a factor a lender will look at when assessing your refinance application. The payment history of a closed account might not be important; however, if an active account with a good payment history is closed, your credit score will dip slightly.
- Adds a new loan to your credit report: Since it’s considered a new loan, it will appear as such on your credit report.
Remember, the long-term benefits of getting a lower interest rate and a lower repayment outweigh the slight dip in your credit score.
What Is The Credit Score Needed To Refinance?
The minimum score needed to refinance your home loan is from 620-1200.
| Credit Score | Refinancing Opportunities |
|---|---|
| 833-1200 | You can get access to lower interest rates and more refinancing options. |
| 726-832 | There are chances for you to get a lower interest rate. Lenders can help with refinancing. |
| 622-725 | This is a good credit score. Some lenders will help with refinance. |
| 510-621 | Lenders will look at your refinance on a case by case basis. They will assess other factors like equity and employment stability. |
| 509 and below | Specialist lenders can help you. |
Is Refinancing Worth It?
Refinancing is worth it if it saves you money or decreases your monthly mortgage repayments. While your credit score takes a dip, it is small and temporary. Here are some tips to follow to ensure refinancing is worth the time and effort.
- Check your credit report before you decide to refinance, to avoid surprises. You can get a free credit report from the major credit reporting agencies.
- Do not miss paying your home loan when you are refinancing. Skipping mortgage repayments during the refinancing process can lower your credit score.
- Make sure you have at least 20% equity in your home before refinancing.
- Do not refinance if you are selling your property soon.
- You should know when the first payment is due after refinancing. If possible, set up a direct debit of your mortgage repayments.
- Keep older accounts with good repayment histories open.
The savings you’ve made from refinancing could be used to renovate your home, pay off any high-interest debts or even create a savings buffer for a rainy day.
Do you want to refinance with the cheapest lender possible? Are you looking for a hassle-free process? We’re here to help. Our expert mortgage brokers have saved homeowners thousands of dollars by refinancing to the right lender. Call us on 1300 889 743 or enquire online today.