Choosing to refinance student loans can be one of the smartest ways to optimize your debt repayment.
Student loan refinance can save you money on interest and simplify your monthly payments by consolidating multiple loans into one. Depending on how you restructure your debt, refinancing could even help you pay off your student loans ahead of schedule.
But do student loans affect your credit score when you refinance?
The simple answer is that refinancing will have minimal impact on your credit — as long as you go about the process the right way. Here’s what you need to know about how to refinance student loans while preserving your credit score.
Do student loans hurt your credit score when you refinance?
Refinancing your student loans doesn’t typically cause a great deal of damage to your credit.
When you decide to refinance, your first move will be to shop around for offers from refinancing lenders, whether that’s with banks, credit unions or online lenders. This shouldn’t affect your credit at all since it only involves a soft credit pull for many lenders.
Only if you find an offer you like and move forward with a full application will a hard credit check be performed. This hard inquiry could impact your credit score, but typically only by five points or fewer.
Of course, if you submit multiple full applications, your credit score could take a bigger hit. That’s why the way you go about applying for refinancing, as well as how you handle your new loan, is a key factor in determining whether refinancing will hurt your credit.
3 ways to ensure refinancing doesn’t hurt your credit
As long as you shop for offers in the right way and keep up with student loan payments, refinancing your student loans shouldn’t put your credit score at risk. This move could actually improve your credit, as it could help you pay off your loans faster.
Here are three savvy ways to go about the process.
1. Only submit a full application for the best offer
Refinancing your student loans is a big decision, so you don’t want to go with the first offer you see. Instead, take time to compare your options and find the lowest rate. Many lenders make it easy to pre-qualify for an offer with no impact on your score.
Only a full application will require a hard credit check, so try to submit just one once you find the best offer. That way, you can limit the number of inquiries on your credit report.
But you should note that your preliminary offer could change after the lender pulls your full report. If the offer is no longer attractive to you, you might have to start over.
Whatever happens, try to keep the number of full applications — and thus hard credit inquiries — to a minimum to protect your score.
2. Continue paying student loans until your student loan refinance is complete
Even though you might be eager to get your refinanced student loan, the process can take time. This is why it’s essential to continue paying off your student loans until your refinanced loan is up and running.
If you stop prematurely, your lenders could report late or missed payments to the credit bureaus, thereby hurting your score. To prevent this from happening, don’t discontinue payments on your student loans until you’re 100 percent sure the refinancing process is complete.
3. Stay current on your refinanced student loan
Just as you don’t want to miss payments on your old student loans, you also must be careful not to skip or make late payments on your refinanced student loan.
Missing payments on debt is a surefire way to harm your credit score. Late payments can be reported in as little as 30 days and can stay on your credit report for up to seven years.
That’s why you should choose repayment terms that will work for your budget. Even though it might be tempting to choose a short repayment term, don’t do so if you’re worried about your ability to keep up with payments.
Plus, most lenders will let you make extra payments without penalty. So you could always choose a longer term on your refinanced student loan and then, if possible, pay more each month to get out of debt faster.
If you do end up with high bills that are difficult to manage, don’t wait until you can’t make a payment to talk to your new lender. Reach out to it to see if it has a hardship program or any flexibility in repayment.
Some top student loan refinancing lenders offer unemployment protection and even forbearance and deferment options. 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 consequences on your credit score. Make sure to stay current on your refinanced student loan so that you can keep chipping away at debt and building your credit score with on-time payments.
When to avoid 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 to refinancing.
Along similar lines, you might decide against this move if you wouldn’t benefit from restructuring your debt with new repayment terms. If you’re not sure how new terms would impact your debt, use our student loan refinancing calculator to compare your old loans with your new offer.
Another reason you might not want to refinance with a private lender is that you’d lose access to federal protections. If you refinance federal student loans, you essentially turn them into a private loan. As a result, you’ll no longer be able to apply for federal income-driven repayment plans, forbearance, deferment or federal forgiveness programs.
As mentioned, some private lenders offer forbearance and deferment options, and some programs award student loan repayment assistance for private student loans. But you won’t have federal options anymore, so make sure you’ve weighed the pros and cons of refinancing before you apply.
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 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, you’ll be able to build a solid credit score.
That good credit score can help you achieve lower interest rates when refinancing student loans. And affordable student loans will help you keep making payments on time every month.
As you think about whether refinancing student loans is worth a potential ding on your credit score, remember this: What’s good for your finances is often what’s good for your credit score.