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How to Prepare Your Credit for Refinancing

3 Min Read • 04/29/2024

Refinancing your home can lead to substantial savings over the life of your mortgage, but the benefits you reap largely depend on the interest rate you secure. A crucial factor in obtaining a favorable rate is your credit score. Preparing your credit for refinancing is an essential step that can help you qualify for the best possible terms. Here’s a guide on how to do just that.

1. Review Your Credit Report

Start by obtaining a copy of your credit report from all three major credit bureaus: Equifax, Experian, and TransUnion. You’re entitled to one free report from each bureau per year through AnnualCreditReport.com. Scrutinize each report for errors or discrepancies such as incorrect account details, misreported payments, or fraudulent activity. If you find any issues, dispute them immediately with the respective credit bureau.

2. Pay Down High-Interest Debts

One of the most effective ways to improve your credit score is to reduce your credit card balances. Lenders look at your credit utilization ratio, which is the amount of credit you’re using compared to your total credit limit. Aim to keep this ratio below 30%. Paying down high-interest debts not only improves your credit score but also reduces your overall financial burden.

3. Avoid New Credit Applications

Each time you apply for credit, a hard inquiry is made on your credit report, which can temporarily lower your score. If you’re planning to refinance, avoid applying for new credit cards or loans in the months leading up to your application. This will help keep your credit score stable and prevent any negative impacts from multiple hard inquiries.

4. Ensure Consistent Payment History

Your payment history accounts for a significant portion of your credit score. To improve or maintain a healthy score, ensure that all your bills are paid on time. This includes not just your credit card payments and loans but also rent, utilities, and other recurring obligations. Setting up automatic payments can help eliminate the chance of missing a due date.

5. Stabilize Your Employment and Income

While not directly related to your credit score, stable employment and income are critical factors lenders consider when evaluating a refinancing application. A steady job and income history show lenders that you’re a lower risk and more likely to make your loan payments on time. If possible, avoid changing jobs or careers just before applying for refinancing.

6. Consult with a Credit Counselor

If you’re unsure about how to manage your debts or improve your credit, consider consulting with a credit counselor. Many non-profit organizations offer free or low-cost credit counseling services. A counselor can help you develop a personalized plan to improve your financial situation and prepare for refinancing.

Preparing your credit for refinancing can take some time, but it’s a worthwhile investment that can lead to significant financial benefits. By following these steps, you can improve your chances of securing a lower interest rate, which can save you money for years to come. Remember, the better your financial standing, the more favorable terms lenders are likely to offer.

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