Every time you take any action as a user of credit, your actions affect your credit score positively or negatively. Refinancing a mortgage or other loan is no different than any other credit activity in that the impact it has on your credit score is dependent upon several key factors.
Factors
Your credit score is based on five main factors, according to Fair Isaac's Corporation, one of the most prominent credit scoring companies. Thirty-five percent of your score is based on your payment history; 30 percent is from the amount you owe; 15 percent comes from the length of your credit history; while the types of loans you have and the number of new loans each make up 10 percent of your score.
Positives
When you refinance your mortgage, you typically obtain a new mortgage that takes advantage of current interest rates, which are usually significantly lower than the rates of your current mortgage. This is usually accompanied by lower monthly payments, making it easier to pay your bills. Paying your bills on time is the most important factor in your credit score, so refinancing can help you improve your score if it lets you more easily make your payments on time.
Negatives
A refinance also may negatively impact your score. In general, the longer you have a loan the more positive impact it has on your score. With a new refinance, you lower the average length of your credit accounts and may lower your score. Also, taking out too many new loans at any time also will hurt your score. These negative factors are outweighed by regular payments and keeping your overall debt load low.
Secondary Impact
Even if your credit score isn't directly affected by your refinance, getting better terms on a loan can have a secondary effect. If, for example, you use the money you save on the lower monthly refinance payments to pay back other bills, your score will increase. If you use the lower payments to go out and start buying more on credit, it will have a negative effect.
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