If you’re considering refinancing your student loans, you’re off to a great start in optimizing your debt repayment.
Student loan refinancing can help you save money on interest, achieve more favorable repayment terms, and simplify your monthly payments.
But how does refinancing hurt your credit?
If done right, refinancing has minimal impact on your credit. Here’s what you need to know.
Does refinancing hurt your credit?
The act of refinancing your student loans doesn’t cause a great deal of damage to your credit.
Shopping around for the best deal from many of the top student loan refinancing lenders begins with a “soft” credit check, which has no affect on your score. If you find an offer you like and move forward with a full application, a hard credit check is performed. But you’ll only lose five points or less off of your FICO score.
That’s why the way you go about applying for refinancing and how you handle your new loan are the key factors in determining whether or not refinancing will hurt your credit.
So how does refinancing hurt your credit? There are several ways refinancing could affect your credit:
- Applying for multiple refinancing offers over an extended period of time, causing multiple hard checks on your credit.
- Discontinuing payments on your current loan while you wait for refinancing to go through, which would lead to a large hit on your credit score.
- Not making your full payments on time on your new, refinanced loan.
So does refinancing affect your credit in a positive way? It all comes down to how you manage your loans after the fact.
How to ensure refinancing affects your credit positively
1. Only apply for the best offer
As mentioned above, when you research lenders to refinance your student loans with, you might notice some will perform a soft credit inquiry first. That means you can be prequalified and find out what terms you’re eligible for without taking a hit on your credit.
A soft pull doesn’t affect your credit because lenders don’t see your entire credit report at that stage. Rather, they collect limited personal information from you, such as your income, amount of debt you want to refinance, and the amount of your monthly payments in order to determine what you might qualify for. From there, they’ll give you a few offers with varying interest rates and repayment terms.
Once you collect offers from your preferred lenders, you can formally apply for the best one for you. It’s important to note that your offer might change when you do. That’s because lenders might want to adjust the interest rate after they’ve seen your full credit report.
In the end, applying with one lender means you only receive a hard pull on your credit once, ensuring a minimal impact on your credit score.
2. Continue paying student loans until your refinance is complete
There can be some confusion when you’re in the process of refinancing your student loans. While it’s fairly easy to collect offers, closing on one of them can take longer.
If you send all of your paperwork in right away and respond quickly to any additional requests the lender has, you might get an answer in two to three weeks. But some lenders can take even longer than that, some take more than 30 days to complete refinancing.
Therefore, it’s of the utmost importance that you continue to pay your current student loans during that process.
No matter what you do, don’t discontinue payments on your current student loans until you’re 100 percent sure the refinancing process is complete.
3. Stay current on your refinanced loans no matter what
The same advice applies here. The single worst thing you can do for your credit is miss payments. Late payments can be reported in as little as 30 days and stay on your credit report for up to seven years.
If you spot signs of financial trouble ahead, don’t wait until you can’t make a payment to talk to your new lender. Reach out to them to see if they have a hardship program to help you out or any other flexibility in repayment.
Some top student loan refinancing lenders offer unemployment protection and even forbearance and deferment options. But these options will vary by lender. Be as proactive as you can to make sure your loans don’t go into default.
Remember, student loans are difficult to discharge in bankruptcy and default can have long-term effects on your credit score.
What’s good for your finances is good for your credit
It’s way too easy to get hung up on achieving the “perfect” credit score. Don’t let a fear of hurting your credit score stop you from taking actions that will improve your financial situation.
If you maintain a positive payment history, have a long history with financial institutions, and keep credit card balances as low as possible (zero is best), then you’ll be able to achieve a good credit score.
That good credit score can help you achieve lower student interest rates when refinancing. And affordable student loans will help you keep making payments on time every month.
As you think about whether or not refinancing student loans is worth a potential ding on your credit score, remember this: it’s important to balance what’s good for your credit score with what’s good for your finances.
Shannon Insler contributed to this article.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Rates (APR)||Eligible Degrees|
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|2.56% - 7.40%||Undergrad & Graduate||Visit SoFi|
|2.57% - 6.32%||Undergrad & Graduate||Visit Earnest|
|2.58% - 8.12%||Undergrad & Graduate||Visit Lendkey|
|2.80% - 7.02%||Undergrad & Graduate||Visit Laurel Road|
|2.54% - 6.65%||Undergrad & Graduate||Visit CommonBond|
|2.90% - 8.34%||Undergrad & Graduate||Visit Citizens|