Dear Student Loan Hero,
I was looking into refinancing my student loans, and I was surprised how important my credit score is in the application process. Then I realized that different banks also have their own credit rating, showing how creditworthy they are. Should I care about a lender’s rating as much as they care about my score?
Dear Student Loan Borrower,
Just as student loan refinance lenders demand your credit score be in tip-top shape, you’re right to turn the tables on them.
Testing a lender’s customer service or checking how long they’ve been in business are among the ways to vet refinancing companies before signing on the dotted line.
And, yes, a bank’s credit rating is another tool to compare lenders side by side.
For the uninitiated, a bank’s rating is similar to a customer’s score — it shows how likely the institution is to repay its debt when borrowing. (If you’re familiar with how lenders make money, you know that many of them borrow funds at lower rates than and lend to you at higher rates.)
Just as a high credit score means you’re a good bet to repay your debt (and are eligible for student loan refinancing), a high credit rating indicates the lender is more likely to make good on its borrowing too.
Unlike numerical credit scores, credit ratings are usually lettered. The three top credit-rating agencies — Moody’s, Standard & Poor’s and Fitch — provide ratings from AAA or Aaa (high) to C or D (low).
Keep in mind, however, that agencies came under fire for their lack of foresight around the Great Recession of 2008, so the ratings they dispense aren’t foolproof. As the agencies themselves admit, the rating is an opinion — an informed opinion, but an opinion nonetheless.
But let’s address your question head-on: Does a lender’s credit rating matter as much as your credit score? In a word, no.
Your score unlocks refinancing and, just as importantly, determines your interest rate. That’s why improving your credit before refinancing is always a good idea.
Their rating, on the other hand, is unlikely to affect much.
Sure, it’s best to stay away from lenders with especially low ratings, particularly in cases of using an open or revolving line of credit. For instance, if you have a home equity loan with a bank that suddenly needs to cut back on its business (or close shop altogether), you could be left in the lurch.
Credit ratings are less useful in the world of student loan refinancing. That’s because education debt is lent and borrowed in the form of installment loans — that is, set amounts repaid over a set span. A bank’s deteriorating rating is unlikely to affect you after signing your loan agreement.
With that in mind, you might consider a bank’s credit rating as simply one sign of a lender’s financial health, to be found via agency websites. Still, the specific rating itself might be of more interest to someone buying the bank’s bonds than to someone taking out a loan.
Be aware that many online lenders, including industry leader SoFi, don’t necessarily have credit ratings, despite the fact that they resemble banks. Reputable refinancing company CommonBond, for example, has scored AAA ratings on recent loan securitizations, but not its overall business. First Republic, a traditional bank with an online presence, meanwhile, posts its strong ratings on its website for all to see.
By all means, if banks are putting your credit score under the microscope, make sure their rating passes the eyeball test too.
Good luck in life and repayment,
Student Loan Hero