Rick Bormin, Personal Loans Moderator
Refinancing a personal loan does hurt your credit but only a small amount and only in the short term. Since refinancing a personal loan involves taking out a new debt to pay off the old one, the hard pull triggered by your application will cause a drop in your credit score.
There are a few other ways refinancing a loan can temporarily impact your credit score, too. You can learn more below, and if you want to estimate how refinancing a personal loan might hurt or help your credit in particular, you can use WalletHub's free credit score simulator tool.
Ways Refinancing a Personal Loan Can Hurt Your Credit
The hard credit inquiry that occurs when you apply for a new loan or balance transfer credit card will cause a small, temporary decrease in your credit score.
Increased Debt Level From Fees
If you refinance using a new loan with an origination fee or a credit card with a balance transfer fee, you will have a slightly increased debt level, which can have a small negative impact on your credit score.
Reduced Account Age
Refinancing a personal loan can decrease the average age of your accounts (older is better for your credit score).
You should be able to bounce back from the credit score drop associated with refinancing a personal loan after several months of on-time payments.
Other Key Things to Know About Refinancing & Credit
Since refinancing a personal loan will hurt your credit temporarily, it's best to avoid doing it right before you're going to make a big financial commitment that requires a credit pull, like buying a car or a house. But if you're not in that situation, refinancing can be a huge help not only to your credit, but also to your finances overall.
When you refinance a personal loan, you move the debt to another lender with a lower interest rate. That helps you pay off the loan sooner and thus get debt-free faster, which is fantastic for your credit. In addition, having a lower interest rate makes it easier to ensure that your payments are on time, which is vital for improving your credit score. Plus, if you use a single loan or credit card to refinance multiple personal loans, the fact that you'll have fewer open accounts with balances can give your score a boost.
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