Refinancing your loans affects your credit. If you restructure to tap into equity, then you will damage your score. If you change your terms to consolidate you might improve your score.

  • Debt accounts for 30% of FICO scores
  • New credit inquiries account for 10% of FICO scores

Another consideration is why you want to restructure your loan. Most people think only about refinancing their house, but you can also do this with car loans. Since it takes a long time and is costly to restructure a mortgage you may want to refinance your car if you need to lower your monthly bills.

Refinancing Bad for Credit

Refinancing your loans affects your credit negatively most of the time. No matter what type of loan you want to restructure, the lender will make an inquiry. In addition, the loan will increase your obligations in most cases. These two aspects will be bad for your score.

Debt to Equity Ratio

If you refinance to take equity out of your home, then you will increase your debt to equity ratio. Doing renovations, getting a lower interest rate or paying off credit cards are all great reasons to tap into your home’s equity. However, if you refinance and increase your total debt then it will affect your FICO (Fair Isaac Company) score.

  • Taking on more debt increases your credit utilization ratio
  • 30% of your FICO score depends on how much debt you have

If you consolidate and decrease your debt to equity ratio, then you may help your score. Most people refinance to tap into home equity, though. Taking on more debt will damage your score.

Lenders Check Credit

Whenever you take out a loan the lender will check your FICO score. When the bank runs a check it negatively affects you. New inquiries account for 10% of your FICO score.

Rate Shopping

Rate shopping will affect you. Whenever you apply for a loan the bank will run your FICO. Each of these inquiries negatively affects you a little bit. The more places you shop the more it affects you. Therefore, be careful about letting lenders run your credit.

Missed Mortgage Payments

Another thing to consider when you are refinancing is missed mortgage payments. The process takes time. The process is complicated. Therefore, many people get confused and miss a payment or two on their existing mortgage.

  • Making a late payment will damage your score
  • If your score falls to low your lender may cancel your refinance

Finally, make sure you know when you need to start payments on your new loan. Often, the bank lets you “skip” a month before your first payment. Do you believe that your mortgage company granted you a grace period? Make sure you verify that with them.1  

Mortgage Vs. Car Loan

Depending on your financial situation you may want to restructure an auto loan rather than your mortgage. There are pros and cons for each strategy.

Pros and Cons

You should consider the pros and cons of refinancing your different loans and how it affects you. Mortgages are larger, longer term loans that are complicated and expensive to refinance. Auto loans are smaller loans that you will want to change only if you can reduce your monthly bills.


Your mortgage is probably the largest loan you will ever have. As equity builds in your home you can refinance for a variety of financial reasons. However, you should think about these issues before you start the process:

  • Closing a refinance takes a long time, often up to two months
  • Costs are significant, often several thousand dollars

Refinancing your mortgage is a major undertaking. Only do this when you need to make a drastic financial change.

Car Loan

The main reason to restructure an auto loan is to get better terms. If your credit improves after you take out your car loan you may be able to:

  • Reduce your payments
  • Change the length of your obligation
  • Lower your interest rate

Car loans have lower principals, so they are much easier to refinance. Generally, you will want to refinance when you are able to lower your monthly bills

Refinance Both

Unless you have a financial crisis, it is probably not a good idea to refinance both loans at the same time.

  • Refinance your home if you need to make a significant financial change
  • Refinance your auto loan if you want to lower your monthly bills

Any time you refinance a loan it will affect you. While there are good reasons to change the terms of your loans you should be careful about making changes to more than one loan at a time.2

Bottom Line

In most cases refinancing your loans affects credit negatively. New inquiries and increased debt to equity ratios are the most common reasons for a drop in your score. In a few cases, such as refinancing to consolidate, you may be able to improve your credit.

Since most refinances negatively impact your score you should make sure you have a good reason to do it. Only refinance your home when you have a major financial change. You may want to refinance your auto loan if you can reduce your monthly bills.


  2. Innovative Funding Sources