What Happens to Your Credit Score When You Refinance a Loan in Kenya

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Refinancing an existing loan in Kenya, such as a mortgage, car loan, or personal loan, has become a popular option for borrowers seeking lower interest rates, extended repayment periods, or debt consolidation.

Essentially, refinancing involves replacing an existing loan with a new one from the same or a different lender.

While this approach can lead to savings and reduced financial strain, it also interacts with the country’s credit reporting system, potentially affecting your credit score.

Kenya’s credit reporting is managed by three licensed Credit Reference Bureaus (CRBs), namely TransUnion, Metropol, and Creditinfo.

These agencies track borrowing behavior, repayment history, and outstanding debts to generate credit scores, which range from 250 to 900 (or AA to JJ in TransUnion’s system).

A higher score signals low risk, unlocking better loan terms, while a lower score may increase borrowing costs or lead to application denials.

Immediate Effects

When refinancing an existing loan in Kenya, lenders perform a “hard inquiry” on your CRB report to assess eligibility.

This inquiry appears on your credit file and can temporarily reduce your score by 5-10 points, with the effect lasting up to 12 months, though most recovery occurs within 6-12 months.

Multiple hard inquiries within a short period, such as checking rates from several banks like KCB, Equity, or Cooperative Bank, can amplify the drop. This is particularly notable if your credit history is limited, as repeated inquiries may signal potential financial stress.

It’s important to note that soft inquiries, such as self-checks through CRB portals, do not affect your credit score.

Short-Term Fluctuations

Once your new loan is approved, the old loan is closed upon full repayment, and a new account opens. Closing the old loan reduces your “amounts owed,” which positively affects your credit utilization ratio, a factor that accounts for 20% of your credit score.

However, closing long-standing accounts can shorten your average credit age, which contributes 10% to the score calculation, potentially causing a temporary dip.

The new loan introduces an installment credit type, contributing 15% to your score calculation. This can diversify your credit mix positively, especially if you also maintain revolving credit like overdrafts.

TransUnion notes that full loan payoffs or closures often cause a 1-2 month dip due to shifts in utilization, but on-time repayments generally restore your score quickly.

For mortgage refinancing involving Kenya Mortgage Refinance Company (KMRC), processes may be streamlined, though individual refinances still carry the same effects. Upfront costs, such as legal fees or property valuations, do not directly affect credit scores but can strain finances if unplanned.

Long-Term Outlook

Consistently repaying your refinanced loan on time allows your credit score to recover and even improve. Payment history dominates credit scoring at 45%, so timely repayments on a lower-rate loan can strengthen your profile. Lower monthly obligations reduce default risk, which further enhances your creditworthiness.

Over time, paying off the old loan and maintaining the new loan responsibly signals financial discipline, potentially increasing your eligibility for future loans.

During temporary CRB suspensions amid the COVID-19 pandemic, many borrowers experienced stability in scores, but standard scoring rules now apply.

Jefferson Wachira is a writer at Africa Digest News, specializing in banking and finance trends, and their impact on African economies.