Does Refinancing Change a Credit Score?

A lender will often report credit accounts to the credit bureaus. The bureaus compile this data and keep it within their database. This information is used to create a consumer credit report on you. Refinancing occurs when you take out a larger loan over an extended period of time to pay off a smaller loan, and this may have an impact on your credit score.

Credit Scores

Your FICO credit score represents how you handle credit and ranges from 300 to 850, according to FICO. It has five areas. The largest portion of the score measures how well you pay your bills at 35 percent. Thirty percent is the amount of debt you have, 15 percent is the average length of your credit history, 10 percent is how much new credit you've applied for recently and the final 10 percent is your credit mix of credit types.

Significance

A refinance can change your credit score depending upon the specifics of your new loan. FICO measures how much credit you have in relation to your level of debt. This is called your credit utilization ratio. The more debt you have, the higher this ratio and the lower your score. When you refinance, you take out a new loan and the old loan balance goes to zero. If the new loan you receive is larger, which means you now have more debt, that will increase your credit utilization ratio and this will lower your score. How much your score changes will depend on the other information on your individual report.

Considerations

Refinancing also requires you to apply for the new loan and give lenders permission to access your credit report. Each time you apply for credit, a hard inquiry will appear on your credit report. If you apply to multiple lenders then you will have multiple new inquiries on your report. This can lower your credit score. Inquiries remain on your credit report for up to two years. When calculating your score, FICO only considers the inquiries from the last 12 months. FICO does make an exception for rate shopping. If you apply for multiple auto or mortgage loans within a short period of time, usually 2 weeks, FICO considers that as one inquiry.

Prevention/Solution

Errors on a credit report can lower your credit score. If you notice inquiries on your report that are older than two years, you have the right under the Fair Credit Reporting Act to file a dispute with the bureau to have them removed. Disputes are filed by mail, phone or online at the bureau's website. If you notice inquiries that you did not make, this could indicate identity theft and you should notify the credit bureau and request a fraud alert be placed on your file. The initial alert remains active for 90 days, or up to seven years if you submit an identity theft police report to the bureau.