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الأربعاء، 26 يوليو 2017

This is Why (and How) Refinancing a Loan Can Affect Your Credit Score

It’s no secret: Refinancing loans can save you thousands of dollars.

Whether you’re refinancing your mortgage and saving $3,600 a year… refinancing your student loans and saving $5,400 a year… or refinancing your credit card debt and saving $12,000 in interest

If you know what you’re doing and can find the best terms and rates, all seems well on the financial front, right?

But we needed to know: Does refinancing affect your credit score? If so, how?

How Refinancing Loans Can Affect Your Credit Score

It’s a dog-eat-dog world out here, and your credit score will affect your refinancing rates and refinancing will affect your credit score.

But it’s not as bad as it sounds.

Rod Griffin, Experian’s director of public education, helped us crack into the illusive world of refinancing and credit scores.

He suggests before you refinance anything, ask your lender: Will my original debt be reported as “paid in full” or as “settled”?

If your original debt is reported as “paid in full, here’s what your credit report sees: You’ve paid off your original debt in full, so that account is no longer active, and there’s no negative history associated with it. The new account, the refinanced one with the better interest rate, is now the active one.

It basically just flips, so you shouldn’t see anything dramatic happen to your credit score. Life’s good.

“What will happen is, because there’s been a change, you’ll probably see your scores dip a little bit initially and then come right back up fairly quickly,” Griffin said. “Give it a full-length cycle or two and then check your credit scores because you’ll probably rebound by then.”

If your original debt is reported as settled, however, that’s when your credit score might struggle.

“When you settle an account, it means that the creditor is agreeing to accept a payoff amount that is less than the amount originally owed,” Experian’s site explains. “Because the creditor is taking a loss, a status of settled is considered potentially negative, though it is better than if the debt was not paid at all.”

So, whatever you do, be sure when you refinance that the lender is reporting your debt as paid in full — not settled.

When You Shouldn’t Refinance Your Loan

You’re initiating some type of change when you refinance your debt — settled or not — so your credit score will bounce a bit, like Griffin said.

Even with that slight change, you shouldn’t plan to make a big purchase within the first few months of refinancing.

“It’s probably best that you hold off because it creates that change, that instability,” Griffin said.

For example, if you’re going to take out a mortgage in a few months, you should probably just wait. Any little drop in your credit score can affect those interest rates, which could cost you thousands in the long run — or even cost you getting approved for a mortgage.

(Here are four other ways your credit report can affect big decisions.)

Before Making Any Decisions… Do This

Before seeing those big dollar savings and deciding you want to refinance, be sure you shop around for the best rates.

We recommend using an online marketplace. For student loans, peruse Credible, which will let you shop around for the best refinancing rates. Then, you can be confident the lower interest rate is worth the refinancing cost.

If you’re thinking about refinancing credit card debt, Even Financial is also a good resource to help match you with the right personal loan to meet your needs. It can help you borrow up to $50,000 (with no collateral needed) and compare interest rates from several lenders. Rates start at 4.99% and repayment plans range from 24-84 months.

You’ll also want to check your credit report.

“With any kind of credit relationship or application, you should always check your credit report in advance,” Griffin said. “Get a credit score. Know what your scores are. Know where you stand in terms of risk before you go in.”

The scores you pull from a free site won’t necessarily be the same a lender sees. In fact, they’ll probably be pretty different, but Griffin assured us that’s OK.

Even if the numbers don’t align, the risk factors will — and that’s what helps determine your credit score.

“When you get a personal credit score, you’ll get the risk factors that go with that score as well,” he explains. “Those risk factors tell you what from your credit report most affected this score.”

Then you know what you need to do to get that score up to help out with those interest rates.

If you’re curious about what other big-life decisions your credit score can affect, read this.

Carson Kohler (@CarsonKohler) is a junior writer at The Penny Hoarder. She tackled this article because her editor was curious, but she also hopes it can help others make informed decisions, too.

This was originally published on The Penny Hoarder, one of the largest personal finance websites. We help millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. In 2016, Inc. 500 ranked The Penny Hoarder as the No. 1 fastest-growing private media company in the U.S.



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