Myth vs. Reality: Does Refinancing Affect Credit Score?
Does refinancing affect credit score? This question has become significant of late, ever since more and more people turned to refinancing to help with their current financial situations.
A record number of Aussie homeowners have opted to refinance their home loans since the official cash rate started going up. This is fantastic news because a proactive response to refinancing can save a mortgage holder thousands of dollars on interest every year.
But despite the obvious benefits, some people are reluctant to refinance. Why? They’re worried that refinancing will hurt their credit score. Is that a legitimate concern? Does refinancing affect a credit score? And if so, how does refinancing affect your credit score?
Understanding Credit Scores
It turns out the average Aussie is a little clueless when it comes to credit scores. Based on a 2022 Finder survey, 73% of Australians don’t know their current credit score, and almost 1 in 2 people have never bothered to check. Alarmingly, around 7% of respondents said they were too scared to check, and an additional 6% confessed they didn’t know what a credit score was!
So, what is a credit score? Basically, it’s a number (usually between 0 and 1,000) that you’re assigned by a credit reporting agency. How does a credit score affect refinancing? Well, lenders use these scores to assess whether or not they should loan you money. A high credit score is an indication that you’re financially responsible, while a low credit score could make it difficult for you to obtain a loan.
Does Refinancing Affect Credit Score?
Does refinancing affect credit score in a negative way? This is a common question because of certain myths about the impact refinancing has on a credit score.
Myth #1: Refinancing Always Damages Credit Scores
Reality: While refinancing may cause a short-term dip in your credit score, refinancing can actually lead to long-term credit score improvement because you’ll be in a better financial position.
Myth #2: Refinancing Hurts Credit Permanently
Reality: Credit scores bounce back relatively quickly if you take positive steps to improve your financial management (like paying your bills on time).
Myth #3: Multiple Refinances Always Harm Credit
Reality: Responsible and strategic refinancing (planned in consultation with a broker) doesn’t have to significantly impact a credit score.
How Does Refinancing Affect Credit Score?
So, how does refinancing affect credit score? Your credit score may be temporarily lowered as a result of:
- Multiple loan enquiries over a short time period.
- Closing a long-term loan.
- Missing repayments while awaiting refinance approval.
How Does a Credit Score Affect Refinancing?
Does a credit score affect refinancing? Yes. Your credit score will have an impact on the terms and interest rates you’re offered by the lender. A higher credit score may help you secure better terms and interest rates. A lower credit score may lead to less favourable terms or even difficulty securing approval. This highlights the importance of maintaining a good credit score so you can optimise the benefits of refinancing.
How Can You Protect Your Credit Score During Refinancing?
You can protect your credit score during refinancing by:
- Minimizing new credit applications.
- Paying bills on time and avoiding major financial changes.
- Keeping credit card balances low.
- Closing old accounts that are not being used.
- Watch the types of loans or facilities that you look at taking on. Example: Short-term money lenders, Afterpay-style facilities, etc. are signs that you may be struggling, and as such, your score may be lower.
- Regularly monitoring your credit report,
- Consult with a broker before applying to avoid multiple credit inquiries.
Ask a Broker: How Does Refinancing Affect a Credit Score?
If you’re worried about the question, ‘How does refinancing affect credit scores? ’, then you’re not alone. But there are steps you can take to minimise the impact. The key is to talk to an experienced mortgage broker. Let them know you want to find out more about how refinancing affects a credit score, and they can provide practical suggestions.
At North Brisbane Home Loans, our experienced team of brokers understands the importance of protecting your credit score. That’s why we’ll only recommend a refinance loan if we believe your application will be approved on the first try. To find out more, book an appointment with one of our brokers today.