Refinancing can be a good strategy for changing your debt situation. It can lower your monthly debt service bill, give you access to large sums of money or allow you to put high interest debt in a lower interest mortgage. The potential effect of refinancing on your credit score is complex and varies from situation to situation.
More or Less Debt?
One factor determining your credit rating is your debt to income ratio. This is a measure of all your monthly debt payments versus your monthly income. If you use the refinance to reduce your monthly debt load by rolling high payment debt into your house payment for a lower monthly total, this can increase your credit score. If you borrow against the equity to spend more money, that can increase your monthly payment amount and reduce your credit rating.
Age of Debt
One place where refinancing usually hurts credit scores is the age of debt. About 5 percent to 10 percent of your credit score is based on the amount of new debt you've incurred. A new mortgage means new debt. However, this by itself usually won't hurt your credit enough to outweigh other advantages.
Ease of Payments
Refinancing to solidify debt by rolling multiple other credit lines into your home equity makes payment easier in two ways. First, most mortgages are longer-term loans at lower interest. This means your monthly payments are smaller and easier to manage. Second, you need only remember to make one payment each month. Easy payments means fewer late or missed payments. A history of on time monthly payments increases your credit score.
Type of Debt
Mortgage debt is considered better debt than consumer debt like credit cards. Type of debt is a factor in your credit score. By converting consumer debt to mortgage debt, you can make a noticeable difference in your credit score.
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