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Updated on July 15, 2022
Refinancing student loan debt has a minimal impact on your credit score — if you follow the right steps.
Refinancing your student loans — especially private student loans — can be good if you’ve improved your credit score since you first took out the loans. You may be able to qualify for a lower interest rate, which can save you thousands of dollars in interest over the life of the loan.
Since you’re taking out a new loan when you refinance, it’s natural to wonder how refinancing affects your credit score.
Ahead, learn the impact applying for refinancing has on your score and what you can do to minimize the hit you’ll take.
Refinancing student loans has a small effect on credit
Your credit score may be docked a few points when you apply for refinancing if you apply with different lenders over a long period of time. If you submit full applications with different lenders over several months, your score can plunge several points because each lender will do a hard credit check of your credit history. Read more about how to refinance student loans with bad credit.
You can avoid incurring multiple hits if you apply within a 14-45 day ‘shopping period’.
Keep in mind that before you submit a full application, you’ll be able to shop around and compare rates and loan terms from refinancing lenders. The lenders will do a soft credit pull during this process, which doesn’t hurt your score. Only when you decide to move forward with an offer and submit a full application will the lender’s underwriting team do a hard credit inquiry.
Your score may also take a slight hit if you’ve already made several years of student loan payments before refinancing. The credit scoring models calculate the average of how long all your accounts have been open. The longer you keep credit accounts open without missing payments, the better its impact on your score.
Learn More: How to Get Rid of Student Loan Debt
A hard inquiry will drop your score by five points or less, according to FICO.
Refinancing can help your credit score
Refinancing student loan debt affects your score because the new loan amount and payments history will be added to your credit report. Your score will increase the longer you go without a late payment. Your payment history accounts for 35% of your FICO score.
After making payments for a while, check your scores with each of the three major credit bureaus — Equifax, Experian, and TransUnion — to see if your score has increased. Consider refinancing a second time after you’ve strengthened your creditworthiness. You may be able to get an even lower rate or even more flexible repayment options.
Learn More: How Often Can You Refinance Student Loans?
How to protect your score when you refinance
Here are three things you should do to avoid putting your good credit score at risk during the refinancing process:
Apply at the same time. Private lenders will do a hard check of your credit file only after you submit a full application. So limit the applications you submit to the offers with the best repayment terms and lowest interest rates. You also want to submit your applications within a short period, so they count as one inquiry.
Keep paying your current loans. Depending on the refinance lender, the loan application process can take several weeks. Keep making the monthly payments on your current loans until the debt is paid off and your new refinanced loan is up and running. Read more about how student loans affect credit.
Make timely payments on your refinanced loan. A late payment on your new loan will damage your credit score, set you back financially, and even result in the loss of any interest rate discounts or rewards you’re receiving. Choose a longer-term if you’re worried about your ability to keep up with the monthly payments. Most lenders don’t have a prepayment penalty. So you can always pay more to get out of debt faster.
Learn More: How to Get Rid of Private Student Loans
When not to refinance
Most federal student loan borrowers shouldn’t refinance their loans. What they’ll gain in getting a lower interest rate pales compared to all the protections and benefits they’ll give up.
By refinancing federal student loans with a private lender, the new refinance loan won’t have access to:
Loan forgiveness programs.
Income-driven repayment plans.
The Covid-19 mandatory forbearance.
Before you refinance, check whether consolidation can help with your situation. While consolidating your old loans won’t lower your interest rate, you may be able to get a lower monthly payment while maintaining eligibility for forgiveness programs, deferments, and other job-loss protections.
Learn More: Can You Get a Discount for Paying Student Loans in Full?
Refinancing student debt might initially hurt your credit score, but if you take the right precautions, it can help improve your credit in the long run.
Just make sure to apply at the same time to multiple lenders, keep making payments on your current loans until the new one is up and running, and choose a repayment plan that you can handle. And if you have federal student loans, consolidating your loans with the Department of Education might be a better option.
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