Will refinancing student loans hurt my credit rating?
Student loan refinancing can save you money on interest and simplify your monthly payments by combining multiple loans into one. Depending on how you restructure your debt, the process might even help you pay off your student loans sooner than you expect.
Refinancing your student loans shouldn’t hurt your credit score either – as long as you are doing the process the right way. Here’s what you need to know about how to refinance student loans while preserving your credit score.
Does refinancing student loans hurt my credit rating?
Refinancing your student loans does not usually cost a lot of money. damage to your credit.
The biggest risk is the rigorous credit check you’ll encounter when applying for new credit, but most refinance lenders offer prequalification when looking for rates. It will not affect your credit at all, as it only involves a soft credit draw. Only if you find an offer you like and go ahead with a full application, the chosen lender will perform a rigorous credit check. This difficult investigation could have an impact on your credit score, but usually less than five points.
Even if you submit multiple full claims, FICO combines all difficult claims into one for credit scoring purposes, as long as you complete them all within a short period of time (e.g. 30 days).
Once you’ve refinanced your loans, the same rules apply as with any other debt. If you continue to make payments on time, it will help increase your credit score. But if you miss a payment, it could lower your score significantly.
It is also important to note that student loans have an impact on your debt to income ratio as well as. While this is unrelated to your credit score, it is an important factor that lenders take into account if you were to apply for, for example, a mortgage, car loan, or credit card. The higher your monthly debt payments relative to your income, the more credit risk lenders will consider you to be.
3 ways to make sure refinancing doesn’t hurt your credit
The credit requirements for a refinance student loan aren’t too stringent, but to qualify for the best interest rates, you’ll want to have a high credit score and a solid, stable income. Otherwise, refinancing may not be right for you.
If you qualify on better terms than you currently have, here are some ways to limit the negative impact of refinancing on your credit score and instead use your new loan to build credit.
1. Quickly complete your rate purchases
Refinancing your student loans is a big decision, so you don’t want to go for the first offer you see. Instead, take the time to compare your options and find the lowest interest rate. Many lenders make it easy to pre-qualify for an offer that doesn’t impact your score.
That said, you won’t get a final offer with a lender until you complete an application, so you may find the best deal in the prequalification process and then end up with a higher rate when you will come forward to apply.
A complete application will require a rigorous credit check, but FICO will not count every application against you as long as it can see a rate buying pattern for a single loan. If you have the time, it’s a good idea to apply to multiple lenders to get a better comparison, but to do it in as short a time as possible.
Carry: Don’t worry too much about applying to more than one lender. Just make sure you do everything in a short period of time so that FICO will combine all the apps into one survey when calculating your credit score.
2. Continue to pay student loans until your student loan refinancing is complete.
After the lender has approved your loan application and you agree to the terms, the next step is for the lender to pay off the loans you included in your refinance. This process can be time consuming, however, so it is essential that you continue to make payments on your current loan until it is paid off.
If you quit prematurely, your lenders might report late or missed payments to the credit bureaus, which will hurt your credit score.
To be safe, log into your online account with your original lenders before making your monthly payment. If there is a balance, proceed to payment. If not, you know the debt has been transferred to your new lender and you can move on.
Carry: Refinancing does not take place immediately after acceptance of the new loan. Continue to repay your old loans until you are 100% sure they have been repaid. Any payment made to the old lender after the loan is repaid will be passed on to the new lender for a few months after the refinance is completed.
3. Stay on top of your refinanced student loan
Just as you don’t want to miss payments on your old student loans, you also need to be careful not to skip or make late payments on your new refinance loan.
Missing payments on debt are a sure-fire way to hurt your credit score. Late payments are usually reported after they’re 30 days past due, and they stay on your credit reports for seven years.
This is why you must choose repayment terms that suit your budget. While it can be tempting to choose a short repayment term so you can pay off your debt sooner, don’t if you’re worried about your ability to keep up with payments. If you’re struggling to keep up with multiple bills, you can also set up auto-pay so that money is transferred automatically every month.
If you find yourself with high bills that are difficult to manage, don’t wait until you can’t make a payment to talk to your new lender. Contact them to see if they have a hardship program or repayment flexibility. Some of the best student loan refinance lenders offer abstention and adjournment options and even unemployment protection. Be proactive to make sure your loans are not in default; Student loans are difficult to discharge in bankruptcy, and defaulting on payments can have long-term consequences on your credit score.
Carry: Make it a priority to stay up to date on your refinance loan so that you can continue to reduce your debt and build your credit score with on-time payments.
Alternatives to refinancing
While student loan refinancing can be a strategic move to save money on interest and get out of debt, it’s not for everyone. If you can’t take advantage of a lower interest rate, refinancing may not be very helpful.
Plus, if you refinance federal student loans, you’ll lose access to some benefits, including student loan forgiveness, some loan repayment assistance programs, income-based repayment plans, and more.
If you’re not sure whether refinancing is right for you, here are some alternatives to consider:
- Consolidate your federal student loans: In most cases, refinancing and consolidating refer to the same process. But with student loans, consolidation Usually refers to the US Department of Education’s Direct Loan Consolidation Program. With consolidation, you can combine several federal loans into one to simplify your repayment plan. Just keep in mind that your new interest rate will be the original loan weighted average interest rate rounded to the nearest eighth percent, so you won’t save that way.
- Ask for forgiveness: The federal government is proposing some student loan forgiveness programs. Specifically, you may be eligible if you work for a qualifying government agency or non-profit organization or as a teacher. Review the Federal Student Aid website for more information on these options.
- Apply for student loan repayment assistance: If you have federal student loans, there is a long list of loan repayment assistance programs (LRAP), primarily offered by government agencies and states. These are not forgiveness programs, but in some cases you may be able to get tens of thousands of dollars in aid.
The bottom line
As long as you follow the process the right way, refinancing a student loan shouldn’t have much of a negative impact on your credit score. In fact, making your payments on the new loan on time can help you continue to build a positive credit history.
Before you refinance, however, consider all of your options to make sure they are the best fit for you. Even though it is tempting, the benefits of some government programs can outweigh the benefits of a refinance loan.
Register for a Bank account to gand answer your personal finance questions from our team of money experts.