Guide to Credit Scores and Student Loan Refinancing
SStudent loan debt is a major burden for millions of Americans. For some people, refinancing these loans for a lower interest rate, lower monthly payment, or fewer loan accounts can help ease this burden.
But there are certain requirements for refinancing, including having a good credit score. This guide will explain the relationship between your credit score and the student loan refinance process, including the score you need to refinance, how your score affects the terms of your new loan, and how your score is affected after refinancing.
How Credit Scores Affect Your Student Loan Refinance Application
When you apply to refinance your student loans, one of the first things any lender will do is perform a credit check, which includes a review of your credit score. Credit scores are generated by credit bureaus (the three major bureaus are Experian, Equifax, and TransUnion), based on data about your payment history on other loans and overall credit usage.
Why lenders use your credit score
Lenders use these scores to assess your creditworthiness – the scores help predict if you are a risky candidate for a loan. A higher credit score tells a lender that you are more likely to repay a loan on time, while a lower credit score indicates that you may have less than ideal credit habits or have may have had difficulty repaying a loan. in the old days. Sometimes a lower credit score simply indicates that you are young and have a very limited credit history. Higher scores can lead to more favorable loan terms (think lower interest rates and lower monthly payments).
Minimum Credit Score Required to Apply for Student Loan Refinance
Student loan refinance criteria are different for different lenders, but you’ll generally need a FICO score in the mid-600s to qualify. This number could be slightly higher or lower between different lenders. Lenders also look at other factors besides your credit score, like your debt-to-income ratio.
But remember: a score at the bottom of a lender’s range doesn’t mean you’ll get the most favorable terms. If your credit score is fair when a lender prefers applicants to have good or excellent credit (a score in the 700s or higher), you’ll likely be stuck with a higher interest rate and higher monthly payments. .
When is student loan refinancing a good idea?
If you think of how to refinance student loansyou should consider whether this is appropriate for your personal situation before proceeding.
If you have federal student loans, your only option for refinancing will be with a private lender. Switching to a private lender means you will no longer have access to federal student loan protections, civil service loan forgiveness, and deferrals. The pandemic moratorium on student loan repayment also only applies to federal student loans. If you refinance, you will no longer be eligible for federal forbearance or other types of financial hardship programs.
But if you already have private student loans — and you’re paying a relatively high interest rate — refinancing may make more sense and can potentially help you get a new loan with a lower rate. If you can’t get a lower rate by refinancing, you should think carefully about your goals before going ahead with the process. If, for example, your primary goal is to refinance over a longer repayment term in order to have smaller, more affordable monthly payments, it may still be a good idea to refinance even if you don’t get a lower rate. But know that it will cost you much more in the long run, since you will be paying interest over a longer period.
Refinancing may also make sense for borrowers who have multiple student loans with outstanding balances. Refinancing will allow you to consolidate multiple balances into one new loan – a type of debt consolidation. This will simplify your monthly payments, as you will only have one payment instead of several. Reducing the number of loans you hold could also give your credit score a boost.
How Credit Scores Affect Your Interest Rate
As with any loan, a higher credit score means a lender is more likely to give you a lower interest rate on your loan. If you have a good credit score when you apply for refinancing, the better your chances of getting a smaller monthly payment and paying less interest over time.
A lower credit score doesn’t necessarily prevent you from qualifying for a refinance, but it does increase the likelihood that you’ll end up with a high interest rate and less favorable loan terms.
What to do if your credit score isn’t good enough to refinance your student loan
If you have bad credit or credit at the lower end of a lender’s preferred range, you still have the option of refinancing your student loans.
One option is to request a refinance with a co-signer. This person will need to have a credit rating that meets the lender’s requirements, and they will sign the loan with you and agree to assume the risk if you are unable to repay it. It’s a big commitment – make sure you both understand what’s involved before you sign.
You can also consider some ways to improve your credit score, such as reducing the amount of credit you use in other areas, putting your credit cards and bills on automatic payment, or signing up for a free credit-building program. Then apply again after increasing your score.
How Refinancing Your Student Loan Affects Your Credit Score
Your credit history determines the loan terms available to you when you refinance, but the relationship doesn’t end there.
How your credit score is affected during the application process
When you apply to refinance your student loans, the lender will do what is called a “hard” credit check. This request will be reflected in your credit report and could lower your score for a short time. If you apply to multiple lenders, difficult applications will generally count as one application if you apply to all lenders in a short period of time. But if your rate shopping spans a month or more, you could end up with several difficult inquiries on your credit report.
How your credit score is affected after taking out the loan
The effect of a new student loan on your credit score depends on your personal situation. If you regularly make your monthly payments on time, for example, you could increase your score by building a stronger history of on-time payments. If you pay late, your score could take a hit.
Refinancing your student loans will also affect the average age of your accounts, especially if you close multiple old loan accounts and only take out one. Having new credit accounts generally lowers your score, while having long-standing accounts is generally better for your credit. Your score may suffer initially, but it will rebound as you rebuild your credit history by making payments on the new loan.
What Happens to Your Credit Score When You Finish Repaying Your Refinanced Student Loans
Your credit score may not change at all after you pay off your new loan balance – data about your payment history during the term of the loan will continue to affect your score even if the account is closed.
Credit bureaus track how many accounts you have open at one time. Your score might go up if you had a large number of existing loans, or it might go down slightly if the loan was one of the only accounts you had open.
What happens if you’re behind on your refinanced student loan payments
Falling behind on your refinanced student loan payments is like falling behind on your pre-refinance student loan payments. If you’re consistently late with your payments, you could rack up costly late fees and your credit score could suffer. Depending on how late your payments are, you may be subject to collections.
Student Loan Refinance and Credit Score FAQs
Do Student Loans Affect Your Credit Score?
Yes, taking out federal or private student loans will affect your credit score. Student loans can help you build a solid credit history, if you regularly make on-time payments. If you miss payments, your student loans will hurt your credit score.
Is Student Loan Refinancing Harming Your Credit?
It depends on your personal situation. Serious credit inquiries from lenders during the application process may cause you to lose some short-term credit, but consolidating multiple loans into one loan that you can more easily repay over time could boost your long-term credit.
What should your credit rating be to refinance student loans?
There is no universal minimum credit score that lenders require from refinance applicants. Generally, you should have a credit score in the mid-600s, although the exact requirements vary from lender to lender. A score at the lower end of a lender’s preferred range will mean less favorable loan terms, while a higher score will mean more generous terms (like a lower interest rate and lower monthly payments).
Conclusion on Credit Scores and Student Loan Refinancing
If you are looking to refinance your private student loans, your credit score will have a big impact on the process. A higher credit score will help you get a lower interest rate, but it’s not strictly necessary to get a new loan during the refinance process.
If refinancing makes your payments easier and helps you stick to a repayment plan, the process could help improve your credit in the long run.
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