When you refinance a mortgage it does have an affect on your credit score, but for many people, refinancing has very little lasting impact. A lender checking your credit score, the removal of the old mortgage and the creation of a new loan are all factors that have a direct impact on your credit score.
Credit Checks
Lenders check your credit report at either Equifax, Experian and TransUnion when you apply for a refinance mortgage. Whenever a creditor checks your credit report, the credit bureaus take note of it and every credit check has a negative impact on your score. However, an occasional credit check has a minimal impact so your score only suffers significantly if you apply for loans at several different lenders and each one checks your credit score within a relatively short space of time.
Account History
The average length of account history accounts for 15 percent of your overall credit score. If you are refinancing a mortgage that you have had for over a year, it causes the average length of account history to lower. If you are paying off a mortgage that you have had for several years and you have very few other open credit lines, it may cause your score to drop fairly substantially in the short-term.
New Accounts
New accounts are bracketed together with credit inquiries so when your new loan shows up on the credit report it has a small but negative impact on your score. The credit inquiry to approve you for the loan and the creation of the loan as a credit product are treated as two separate events for credit reporting purposes, and the two combined could knock a few points of your score. Additionally, a new account lowers your average account history so it hurts your score in more ways than one.
Other Considerations
If you choose to lower your overall debt payments by consolidating credit card debt and car loans into a refinance mortgage, it can have a major effect on your score. Aside from lowering your average length of credit history, you also suffer because 10 percent of your score looks at the type of credit you use. If you do not utilize different types of credit, your score falls. Finally, a new loan has a 100 percent level of utilization until you pay down the principal, and credit utilization levels account for 30 percent of your credit score. If you pay off and close other loans with low utilization levels, you hurt your overall utilization score.
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