What is the downside to refinancing?

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.... read full answer

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

Hard Inquiry

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.

The difference between credit card refinancing and debt consolidation is the number of accounts involved. Credit card refinancing usually involves one debt, while debt consolidation involves merging multiple debts. Both credit card refinancing and debt consolidation allow borrowers to reduce the cost of paying off existing debt by lowering the interest rate applicable to the debt, when done successfully. As a result, when you consolidate debt, you are technically refinancing it, too, assuming the terms are different from those of your original lender(s).... read full answer

Credit cards and loans can both be used for refinancing or consolidation. However, when the terms “credit card refinancing” and “debt consolidation” are used together, they’re usually comparing a balance transfer credit card to a debt consolidation loan. So, for the purposes of this answer, “credit card refinancing” will refer to using a balance transfer credit card to reduce the cost of a debt, and “debt consolidation” will refer to combining multiple debts with a single loan.

Here are the differences between credit card refinancing and debt consolidation:

Ultimately, the choice between credit card refinancing and debt consolidation comes down to your specific debt situation and credit score. Once you have made a decision, prioritize your monthly payment obligations and practice good financial habits to avoid future debt problems.