Some people use refinancing to reduce their monthly payments and free up some extra cash. It also helps them enjoy a lower rate of interest. Although it is an effective way to lower the payments, should you really use it? Refinancing sounds like a great option, but it has advantages and disadvantages. Refinancing an outstanding loan and getting a new one can have an effect on your credit score. It can reduce or lower your credit score as well. Thus, before finalising your decision on refinancing, ensure to consult a finance broker in Sydney. Before you learn how refinancing impacts your credit score, let us first understand what refinancing and credit score. 

What Is Refinancing?

Refinancing is the process of replacing an old loan with a new loan, usually with different terms and conditions. It is commonly done to decrease the number of monthly payments, reduce the term of the loan, get a better rate of interest, or access the equity in the property. Refinancing can help you save money over the life of the term by paying low monthly payments. For example, if you have applied for home loans in Sydney and get a better option or mortgage with better terms, you can decide to refinance your loan. But before you do it, consult with your finance broker and check whether refinancing is really needed. 

What Is A Credit Score?

A credit score of a person is used to determine their creditworthiness and ability to pay back the loan. It is represented in numbers and contains the credit history of a person. Using a credit score, you can learn about the person’s borrowing and payment history. It helps in determining if the person pays their debt on time and whether or not they have delayed payment or skipped payments. When an institute or bank asks for your credit details, it puts an inquiry on your credit card. Thus, you must know credit inquiry and how it can impact your credit score.

How Does Refinance Affect Your Credit Score?

Refinancing can hurt your credit score as it can lower your credit score. However, it really depends on your situation and how fast you repay your outstanding loan. Consult your finance broker in Sydney for proper guidance regarding whether or not you should refinance your loan. 

For instance, if you are able to pay off loans faster because of a low rate of interest, over time, it will help you increase your credit score. Nonetheless, it depends on different factors, like making repayments on time each month. You should not skip or miss any payment; otherwise, it gets recorded on your credit score. Hence, consider all aspects and factors before refinancing.

Conclusion

Refinancing can be a great option to get a better deal that offers good terms and conditions, lower interest rates, decreased amount of payment required to pay monthly and manage your finances well. Refinancing for a home loan in Sydney or other student or auto loans can reduce your credit score. Consider different factors and consult an expert before you decide to refinance.