Refinancing student loans is a smart move for many borrowers, especially those who have improved their credit score since taking out their original loan. By securing a better rate, you could save hundreds or thousands of dollars in interest over time. Refinancing also shouldn’t hurt your credit score beyond docking a few points when you apply; in fact, refinancing could actually improve your score if it helps you stay current with payments.
Reasons why your credit score might drop after refinancing
There are a few circumstances where refinancing could be detrimental to your credit score.
A hard credit check lowered your score
When you refinance your student loans, you take out a new loan that replaces some or all of your existing loans. As with any new type of credit, this process will require a hard credit check. Hard credit checks allow lenders to view your credit file and determine whether they’d like to lend to you.
The good news is that a hard credit check has a minimal impact on your score, especially if you have a long credit history and an otherwise-solid score. Hard inquiries typically stop affecting your score after a year.
You’ve applied with multiple lenders over a long time period
Shopping around is a key part of taking out new credit, as it’s the only way to determine which lender will offer you the cheapest loan. With that said, multiple credit inquiries can damage your score. FICO Scores evaluate how many new accounts you have, how many recent inquiries you have and how long it’s been since you’ve opened an account — so applying with multiple lenders or taking out a new credit card at the same time as a refinancing loan could hurt your credit.
There are a few ways to mitigate this. For one, many lenders offer prequalification, which involves only a soft credit check. This is the best way to shop around without facing negative impacts. You should also try to limit any new applications to a 14-day time frame; depending on the scoring model, this will count as only one hard inquiry.
You missed a payment
Missing payments is the biggest way refinancing could impact your score. Payment history makes up 35 percent of your FICO Score; if you refinance into a new monthly payment that you can’t afford, you could be setting yourself up for credit trouble.
Before refinancing, consider the monthly payment you have now and how that will change with your new interest rate or repayment term. If you’re not confident in your ability to afford the new payment, choose a longer term; doing so may cost you more in interest over time, but it will lower your monthly obligation.
You’ve shortened your credit history
If you’ve already made several years of student loan payments before refinancing, consolidating those loans into a new one could lower your score slightly. Credit scoring models favor accounts with long histories — and refinancing replaces multiple loans with long payment histories with a single loan with a shorter payment history.
This may not impact you as much if you have several other credit accounts with long histories. But before you refinance, be aware that it could significantly cut the average age of your accounts.
Reasons why refinancing could help your credit score
If you manage your money right, refinancing could improve your credit. This is particularly true if refinancing helps you make your monthly payments.
Paying your loans by the due date proves that you are a responsible borrower, and those timely payments will translate to a higher credit score. If you were struggling to make payments before, refinancing could be a good way to lower your monthly bill and ensure that you never miss a payment.
Set up reminders in your phone or calendar to make your payment. If you want to simplify the process, you can also automate your student loan payments. Some lenders even provide a discount for setting up autopay.
Alternatives to student loan refinancing
While student loan refinancing can be a strategic move for saving money on interest and getting out of debt, it’s not for everyone. If you can’t qualify for a lower interest rate, there might not be much point in refinancing.
What’s more, if you refinance federal student loans, you’ll lose access to certain benefits, including student loan forgiveness, some loan repayment assistance programs, income-driven repayment plans and more.
If you’re not sure that refinancing is right for you, here are a few alternatives to consider:
- Consolidate your federal student loans: With student loans, consolidation typically refers to the U.S. Department of Education’s Federal Direct Loan Consolidation program. Consolidation lets you combine multiple federal loans into one to simplify your repayment plan. Just keep in mind that your new interest rate will be the weighted-average interest rate of the original loans rounded up to the nearest one-eighth percent, so you won’t save money this way.
- Apply for forgiveness: The federal government offers a few different student loan forgiveness programs. Specifically, you may qualify if you work for a government agency or an eligible not-for-profit organization or as a teacher.
- Request student loan repayment assistance: If you have federal student loans, there is a long list of loan repayment assistance programs (LRAPs), primarily offered by government agencies and states. These aren’t forgiveness programs, but in some cases, you may be able to get tens of thousands of dollars in assistance.
The bottom line
As long as you go through the process the right way, student loan refinancing shouldn’t have much of a negative impact on your credit score. In fact, making your payments on time on the new loan can help you continue to build a positive credit history.
Before you refinance, consider all of your options to make sure that it’s the best fit for you. Even if it’s tempting to save money on interest, the benefit of some government programs can outweigh the perks of a refinance loan.