Does Refinancing Student Loans Hurt Your Credit?January 27, 2023
You’ve heard that student loan refinancing can help you save money and pay off your loans faster. But does refinancing your student loans hurt your credit?
When you refinance your loans, the lender will perform a hard credit inquiry. Hard credit inquiries can cause your score to drop by a few points, but the impact isn’t long-lasting. In fact, refinancing can benefit your credit score over time.
Understanding what factors impact your credit will help you maintain or even improve your credit score when you refinance your debt.
Can Refinancing Hurt Your Credit Score?
Refinancing is a popular strategy for managing student loan debt. With this approach, you work with a lender like ELFI to consolidate your existing student loans — including private or federal student loans — into a new loan with a lower interest rate or different terms.
The lender will review your application and perform a credit check when you apply for any form of credit, including student loan refinancing. The lender will ask for your consent for a hard credit inquiry.
Unlike soft credit checks, which have no impact on your credit, hard credit inquiries can cause a small decrease in your credit score. According to myFICO, hard credit inquiries typically cause scores to drop by fewer than five points.
Opening a new credit account, which includes a new loan, can also cause a modest decrease. However, new credit accounts for just 10% of your credit score, so the impact is minimal.
Although refinancing your student loans can impact your credit score, the effect is temporary.
How To Ensure Refinancing Your Student Loan Doesn’t Hurt Your Credit
Take the following steps to minimize the impact of student loan refinancing on your credit:
Use Prequalification Tools
Many lenders, including ELFI, offer prequalification tools. These tools allow you to check the rates and terms available without incurring a hard credit inquiry. By prequalifying with lenders, you can shop around and compare loan options to find the best deal.
Stay Current On Payments
When it comes to determining your credit score, the biggest factor is your history of timely payments. To maintain or even improve your credit, making all of your payments on time is critical.
Throughout the application process, continue staying up to date on all of your existing payments. Once the refinancing application is completed, and your existing accounts are paid off, sign up for automatic payments to ensure all of your payments are made on time.
Limit Your Applications To a 30-Day Window
Shopping around before refinancing your loans is a smart idea, and a full refinancing application requires a hard credit check. It’s wise to limit the number of hard credit checks that occur to protect your credit score. However, if you do have to undergo multiple inquiries, try to limit them to a 30-day window.
Loans that frequently involve rate shopping, including student loans and student loan refinancing, are treated differently than other forms of debt. Multiple inquiries for the same type of product are treated like a single credit inquiry, so keeping your inquiries within the 30-day period will minimize the impact to your credit.
Continue Using Other Forms Of Credit
Your credit mix, or the variety of products you use, is another factor that affects your credit score. Lenders like to see that you can responsibly handle several forms of credit, such as credit cards and installment loans.
After refinancing your student loans, continue using any existing revolving credit accounts to maintain a healthy credit mix. Make sure to make all your payments on time and keep your utilization rate low to keep your credit score up.
How Refinancing Can Help Your Credit Score
While the initial hard credit inquiry associated with student loan refinancing can cause a small decrease in your credit score, refinancing can benefit your credit over the long term. Refinancing can boost your credit in the following ways:
- It may be easier to afford your payments: When you refinance your existing student loans, you may qualify for a lower interest rate or a longer repayment term, or both. With these perks, refinancing can reduce your monthly payments. With more breathing room in your budget, making your payments on time may be easier, an essential factor in building a strong credit score.
- You can pay down high-interest debt: By refinancing your loans, you could get smaller monthly payments, freeing up money to put toward other debt. If you have high-interest accounts, such as credit card balances, paying down your balances can lower your credit utilization and boost your credit score.
- You could pay off your debt: If you take out a loan with a lower interest rate than your existing debt, you may be able to pay off your loans faster. By eliminating your debt sooner, your credit report will reflect that you paid off the account in full, and you’ll have more money each month to pursue other goals.
Thanks to the benefits of student loan refinancing, you can improve your credit and your overall financial health.