Does Refinancing Mortgage Hurt Your Credit Score?

Mortgage refinancing can be a valuable financial tool for homeowners, potentially leading to lower interest rates, reduced monthly payments, or access to home equity. A common consideration for many exploring this option is how it might influence their credit score. Understanding how refinancing interacts with credit reports is important for an informed financial decision.

Understanding Your Credit Score

A credit score is a numerical representation of an individual’s creditworthiness, primarily used by lenders to assess risk. This three-digit number, often ranging from 300 to 850, helps determine loan eligibility and interest rates. The information used to calculate credit scores comes from credit reports, which compile a history of financial behaviors.

Credit scoring models, such as FICO and VantageScore, weigh several factors differently. Payment history holds the most weight, typically accounting for about 35% of a FICO score, reflecting on-time bill payments. The amount owed, or credit utilization, is another significant factor, making up roughly 30% of a FICO score. This factor considers total debt relative to available credit limits.

The length of credit history, which includes the age of the oldest account and the average age of all accounts, contributes about 15% to a FICO score. New credit, reflecting recent applications, accounts for approximately 10% of the score. Finally, the credit mix, or the variety of credit accounts like mortgages, auto loans, and credit cards, makes up the remaining 10%.

Immediate Credit Score Impacts of Refinancing

Applying for a mortgage refinance can cause short-term credit score changes. A primary factor is the “hard inquiry” that occurs when lenders check your credit report to evaluate your application. This inquiry is recorded on your credit report and can temporarily reduce your score by a few points, typically 5 to 10.

While multiple lenders may perform hard inquiries during mortgage rate shopping, these are often treated favorably by credit scoring models. Most models count multiple mortgage inquiries within a specific timeframe (14 to 45 days, depending on the model) as a single inquiry. This allows consumers to compare loan offers without excessive negative impact.

Opening a new mortgage account is another immediate effect. A new loan can reduce the average age of all your credit accounts. Since the length of credit history is a component of your credit score, this can lead to a minor, temporary dip that typically resolves as the new account ages and is managed responsibly.

Ongoing Credit Score Considerations After Refinancing

Once a mortgage refinance is complete and the new loan is active, several ongoing factors influence your credit score. The most significant factor is consistent, on-time payment behavior. Payment history accounts for the largest portion of your credit score; timely mortgage payments build a positive record. Conversely, missed or late payments can substantially lower your score and remain on your report for up to seven years.

The length of your credit history continues to be a consideration. When an old mortgage account is closed and replaced with a new one, the average age of your credit accounts can decrease. While this factor typically has less influence on your score than payment history, it is still a component that evolves over time. Maintaining a long history of responsible credit use, including older accounts, is beneficial.

For those undertaking a cash-out refinance, the impact on credit utilization is notable. Using funds to pay off high-interest debts, like credit card balances, can significantly lower your overall credit utilization ratio. This reduction can positively affect your credit score, as a lower utilization ratio is viewed favorably. However, taking on more debt without a plan to manage it can increase your overall debt burden, potentially impacting credit utilization negatively.

The credit mix, which considers the types of credit accounts you manage, is also affected. A mortgage is an installment loan with fixed payments over a set period. If the new mortgage diversifies your credit portfolio by adding a different loan type, it can contribute positively to this factor, though its impact on the overall score is smaller compared to payment history and amounts owed.

Monitoring Your Credit During Refinancing

During refinancing, actively monitoring your credit report and score is important. You are entitled to a free copy of your credit report from each of the three major credit bureaus—Equifax, Experian, and TransUnion—once every 12 months via AnnualCreditReport.com. Checking these reports allows you to verify accuracy, identify new inquiries, and confirm new account openings.

Many credit monitoring services, both free and paid, provide alerts for changes to your credit file. These services can notify you of new accounts, inquiries, or significant score fluctuations. While minor score fluctuations are normal during refinancing, consistent monitoring helps you quickly identify and address potential errors or suspicious activity.