Loans
August 21, 2019
By Mary Beth Eastman

Will Refinancing Student Loans Affect Your Credit Score?

Simple. Thrifty. Living.

When interest rates are available at lower rates than you’re paying on your current student loans, it’s tempting to go the refinancing route. But it’s also likely to impact your credit score. So, it’s important to know the effects of making this financial decision. Here’s how refinancing your student loans impact your credit score.

Refinancing your student loans doesn’t typically hurt your credit score, but it can decrease it, since you are permitting a hard inquiry. By submitting multiple refinancing applications, your credit report receives multiple inquiries. That means your credit score can take a hit. This can lower your score anywhere from a few points to  five points or more, in some cases. Moreover, hard inquiries take two years to “drop off,” or be removed from your credit report. So, keep your applications to a minimum and shop around first before submitting your refinancing application.

The great part about refinancing your student loans is that it gives you the chance to lower the interest you pay on your loan. That means you are better able to afford your monthly payments, which encourages on-time payments. This gives you the opportunity to improve your credit score.

But if you plan to refinance your loan, ensure you continue paying on time. Even if you believe you will qualify for a new interest rate that lowers your existing interest rate, missing payments can lower your credit score. The process for refinancing your loan can take 30 or more days before your new loan rates are approved. So, you’re still responsible for your current student loan bills.

Unlike credit card debt, lenders typically don’t consider student loan debt “bad debt,” and paying on time can work in your favor. That’s because making on-time payments typically increases your credit score over time. But if you are unable to make a payment, it’s important to contact your student loan service provider. Missed payments are typically reported after 30 days. So, if you contact your loan provider before you know you may miss a payment or even right after, you may have a chance for other options to make your payment, such as getting a temporary administrative forbearance.

Refinancing your student loans is a great opportunity for taking advantage of lower interest rates. But it’s important to know the impacts of making this financial move. Even if your credit score may slightly decrease initially, you may still benefit from an increase of an approved credit score if you are able to pay on time.

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