Refinancing Student Loans and Credit Scores: What You Need to Know

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Updated on Thursday, November 15, 2018

You probably know by now that a minimum credit score is required for refinancing student loan debt.

But did you know that your score could rise or fall while you apply to refinance, or even while your repay your new, refinanced debt?

Here’s everything you need to know about how student loan refinance and credit scores can affect each other.

What’s the credit score needed to refinance student loans?

Each lender has underwriting criteria to determine if you’re eligible for refinancing. They’re concerned with your debt-to-income ratio, employment history and other factors, but chief among these is your credit score. In fact, your score could make or break your application.

Most reputable lenders prefer borrowers who have at least good credit scores. Experian, one of the three major credit bureaus, defines a good score as any mark at or above 670.

Here are some examples of lenders’ current minimums:

Other lenders feature different credit score minimums for different types of applicants. Splash Financial, for example, currently requires a 670 score for applicants with cosigners, but a 700 for solo applicants.

To unlock the lowest refinancing interest rates available, meanwhile, you’re better off waiting until your score climbs into the 700s and beyond.

Every percentage point matters. Repaying $20,000 over 10 years at a 6% rate, for example, would cost in $6,645 of interest. Paying back the same amount over the same timespan at 5% would carry just $5,456 of interest.

How does applying to refinance your student loans affect your credit?

Many lenders offer the ability to prequalify in minutes for a refinanced loan without affecting your credit. You’ll provide some basic information about yourself and your debt, and the lender will perform a “soft” credit pull to vet you as a borrower.

Submitting a formal application for a loan, however, will result in a “hard” check on your credit report. This hard check could diminish your credit score by as much as five points, so it’s generally recommended to only submit a formal application with the lender with your best offer.

However, another strategy is to apply to different lenders but to do so in a short timespan, say one week, as this will minimize the impact on your score.

How does refinancing student loans affect your credit score?

When you put pen to paper and refinance your federal or private student loans, you consolidate your original loans into one new loan. Your credit report will show the older loans as being paid off and the new loan as being recently opened.

These transactions could ding your report. That’s because a 35% chunk of your FICO score, the most popular of credit scores, is determined by your payment history. With no payment history attached to your new account, your credit score could drop.

Say, for example, that you’re looking to refinance parent PLUS loans. Perhaps you made timely payments for years on those loans, and your credit score had steadily increased. With these loans falling off your report as a result of refinancing, you’ll no longer receive credit for the strong, continuing payment history — and your new, refinanced loan will lack a payment history altogether.

Despite all this, the pros of refinancing usually outweigh the temporary and slight harm to your credit.

By refinancing your PLUS loans, for example, you could lower your interest rate and potentially save money during repayment. Or maybe you could consolidate your debt on a more conservative repayment plan, reducing your monthly payments. However, by extending your payments you may pay more in interest over the life of your loan.

It’s unlikely that you would trade benefits like these for a few points on your credit score.

How does making loan payments affect your credit score?

With your new, refinanced loan, your credit score could creep upward or fall off, depending on the success of your repayment.

As you make timely payments — and your payment history lengthens — your score should increase. After all, you’re proving that you have the ability to repay what you borrow.

On the flip side, if you become delinquent (or worse, default) on your refinanced loan, your score will reflect it. In fact, a 30-day delinquency could drop your score by as much as 100 points, depending on your original credit score level, according to FICO.

You’re better off choosing a conservative repayment plan and making extra — or extra large — payments to your lender. Reputable refinancing companies don’t impose prepayment penalties if you pay off your debt faster than planned.

If you still struggle to keep pace with your repayment plan, you can protect your credit score by exploring options for loan deferment or forbearance. These measures could allow you to pause your repayment in the event of a job loss or other major life event.

While they’ll be noted on your credit report, rest assured that neither deferment nor forbearance will affect your credit score.

How does paying off your loan affect your credit score?

Once you pay off your refinanced loan, you’ll likely be over the moon (and you should be). From a practical standpoint, however, closing the loan on your credit report might decrease your credit score.

The drop occurs because the closure affects your credit mix, which represents 10% of your FICO score. Removing the refinanced loan, which is a type of installment loan, from your credit report might leave you only repaying revolving credit, such as your standard credit card debt.

Your score could also experience a dip because your amounts owed, which is 30% of FICO’s scoring formula, have decreased.

That’s not to say that paying off your refinanced loan is a bad idea. Of course, it’s the opposite!

Still, be aware that your credit score could take a temporary hit. Keep this in mind especially if you’ve been protecting your score for future borrowing purposes, such as taking out a mortgage for a home. (Like student loan refinancing companies, however, mortgage lenders will also take into account your improved debt-to-income ratio.)

Check your credit before applying to refinance your student loans

Student loan refinancing isn’t always the right step for every borrower. You won’t be able to reap the benefits of refinancing your education debt, for example, if you have a subpar credit score.

Take the time you need to improve your score before you begin the process of completing refinancing applications. To get started, access your full credit report free of charge via AnnualCreditReport.com and track your three-digit score using one of the free services available online.

If your score is poor, and there’s a long road to recovery ahead, take a break from your refinancing research. Instead, you might examine your student loan forgiveness options.

On the other hand, if your score is already good to great, now could be the right time to refinance. Take the next step by reviewing the rates and offerings of student loan refinancing companies listed on our site.

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