How Student Loans and Refinancing Affect Your Credit Score

Student loans affect credit score

You’ve heard about student loan refinancing. You learned how you can consolidate your student debt with a lower-rate loan. Maybe you even decided you’re going to do it — but then you started worrying about your credit score.

It’s important to understand how student loans affect credit scores — and how refinancing plays into that. Here’s what you need to know about your credit score, student loans, and refinancing.

How do student loans affect your credit score?

Like all debt, student loans affect credit scores. But that isn’t necessarily a bad thing.

In fact, your student loans can positively impact your credit score. If you make on-time monthly payments, student loans give you the opportunity to show lenders you can use credit responsibly. If you also have credit cards, student loans enable you to have a better credit mix — which shows you can effectively manage different types of debt.

Payment history and credit mix make up a combined 45 percent of your credit score. Performing well in those two areas can raise your score substantially.

Lastly, the unfortunate fact that you’ll probably be paying your student loans for several years enables you to build a long credit history. The length of your credit history makes up another 15 percent of your score.

Student loans can affect credit scores in negative ways, but whether that happens is up to you. If you make late payments or go into default, your credit score will take a serious hit. Just one missed payment can damage your credit score for more than a year, according to VantageScore.

Some borrowers worry that high amounts of student loans might hurt their score. However, student loans are not factored into your credit utilization, which tracks how much revolving credit you’re using.

And while student loans are factored into your debt-to-income (DTI) ratio, this ratio isn’t factored into your credit score. However, lenders do look at your DTI when deciding to approve you for credit.

When you think about how student loans affect your credit score, you shouldn’t worry too much. As long as you always pay your monthly bill on time, the effect will be positive.

4 facts about credit scores and student loan refinancing

Now that you know how your student loans can affect your credit score, let’s talk about how refinancing your student loans can impact your score.

1. You can qualify for refinancing without hurting your credit score

Many top student loan refinancing lenders don’t do a hard credit pull before showing you offers. That means you can see what kinds of interest rates and terms you might qualify for without hurting your credit score.

This is possible because of something called a soft credit pull. A soft credit pull is a way for lenders to put together a prequalification offer for you without having to request your credit report.

This gives you a chance to collect offers from more than one lender without hurting your score. After you’ve reviewed all your offers, you can compare them before applying for the best deal. Keep in mind, the offers you’re shown and the actual terms you qualify for once you officially apply can be different, but they should be close to the same.

2. You can increase your chances of approval by paying down revolving debt

If your credit score is preventing you from being approved for refinancing and you’re carrying a balance on your credit card, there’s a simple way to boost your score.

Reduce your credit card debt as much as possible before you reapply for refinancing. This will lower your credit utilization ratio and increase your credit score. An even faster method is to request a higher credit limit on your card. That, too, will reduce your credit utilization.

But if you do request a higher credit limit, don’t use it. Going deeper into debt will only increase your credit utilization and cost you money.

Try to keep your credit utilization at 30 percent or less. In fact, if you aren’t carrying a balance on your credit card right now, keep it that way for one full billing cycle before you apply for student loan refinancing. That way you can be sure that your balance is reported as zero when refinancing lenders pull your credit report.

3. Auditing your credit report can increase your chances of approval

Another way to improve your chances of approval is to audit your credit report. You can get free copies of your report at

Auditing your credit report could uncover errors you didn’t know about or past debts that went off to collections. Even a bill you forgot about from years ago could be showing up on your report. By reviewing your report annually from each of the three credit reporting agencies, you can ensure that your credit score isn’t being dragged down by a debt or error you didn’t know about.

If you do see an error or fraudulent account on your credit report, dispute it immediately.

4. Refinancing student loans won’t have lasting damage on your score

Finally, when you think about refinancing or student loan consolidation and credit scores, don’t sweat the effects on your credit too much. While applying for a new loan will impact your score, the damage won’t be that bad.

According to myFICO, “For most people, one additional credit inquiry will take less than five points off their FICO scores.”

Five points aren’t that much in the grand scheme of things. The real danger comes when you formally apply for a lot of credit at the same time because then those points can start adding up. That’s more reason to collect prequalification offers from various lenders but then only apply for the best one.

As for the effect of taking on new debt, it’s a bit of a wash in this case. Your refinanced student loan will immediately be used to pay off your current student loan or loans. Therefore, your debt amount will remain the same.

Refinancing your student loans could be worth the hit to your credit score

As important as it is to understand refinancing and how student loans affect credit scores, it’s even more important to remember why you wanted to refinance your student loans in the first place.

Ultimately, refinancing student loans is all about getting a lower interest rate so you can pay your student loans off faster or achieve lower monthly payments. Either way, paying less in interest is far more beneficial than losing a few points on your credit score.

It’s easy to get caught up in the race for the best credit score possible — just don’t let it lead you to decisions that are bad for your bottom line. Learn to balance the two for your best financial outcome.

Interested in refinancing student loans?

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