So you want to refinance your student loans – congratulations! You can potentially save thousands of dollars in interest and shave years off of your repayment term.
However, you may be wondering: how will applying to refinance student loans affect my credit score?
Fortunately, the impact of refinancing on your credit score should be minimal – but it does have an impact. And depending on other life plans you might have where your credit score needs to be as high as possible, it’s a good idea to approach refinance strategically so you’re not put in a tough spot.
How student loan refinancing works
Refinancing means that you are taking out a new loan that pays off your old student loan(s). The old loans will show as paid off on your credit report and the accounts will be closed. The only open account will be your new loan with the refinancing company.
The terms and conditions of your old loans, including interest rate, repayment term, deferment and forbearance eligibility, etc., do not apply to the new loan, which will have its own conditions and terms that vary depending on which refinancing company you choose.
How does refinancing affect credit?
There are a couple of ways that refinancing can impact your credit.
Hard credit inquiries
The first is via a “hard” credit inquiry. This is when you formally apply for credit with a lender and they check your credit report.
Generally speaking, hard credit pulls have a minor impact on your credit score. However, if you have a short credit history, few accounts, or many hard pulls within a short period of time, they can have an outsized effect.
According to myfico.com, “people with six inquiries or more on their credit reports are eight times more likely to declare bankruptcy than people with no inquiries on their reports.” Essentially, many inquiries are a sign you’re desperately trying to get your hands on a line of credit – a red flag to lenders.
The only time this is not the case is when you’re clearly “rate shopping” before getting an installment loan such as an auto loan or mortgage. Multiple hard credit pulls for the same type of loan are usually counted as a single inquiry if they occur within a 45-day period. That’s because credit bureaus understand you are likely trying to find the best deal before committing to a loan.
Fortunately, the best private student loan refinancing companies will allow you to find out what rate you qualify for through a “soft” inquiry instead, anyway, which doesn’t show up on your credit profile.
If you’re shopping around for the best student loan rates, be sure to find out if the lender does a soft or hard pull to estimate your rate first.
New credit
The second way refinancing can affect your credit score is by adding a new credit account to your profile. FICO credit scores (the most common type) are determined by the following factors:
- Payment history (35 percent)
- Amounts owed (30 percent)
- Length of credit history (15 percent)
- New credit (10 percent)
- Credit mix (10 percent)
While refinancing doesn’t impact most of these, you are closing an old account and obtaining new credit. This can affect your credit score.
Factoring credit into the refinancing decision
If all you’re doing (and all you’re planning on doing) in the near future is refinancing your student loans, then you probably don’t have much to worry about in terms of an impact on your credit.
However, if you also plan on making other major financial moves in the near future – like buying a house or car, or applying for a new credit card – you may want to slow your roll.
Undertaking that many major money endeavors in a short period of time will result in more hard pulls and flag you as a financial risk in the eyes of the majority of lenders. It takes about two years for hard inquiries to “fall off” your credit report.
Pacing yourself accordingly gives your credit time to recover between hard pulls and will give you the best chance to be approved for new credit at favorable rates.
Of course, even if you wait the requisite amount of time, the odds of you being offered a great rate on future credit also depends on being responsible with all your open credit in the meantime. That means making all payments on time and in full, every time.
Don’t be afraid, but do be responsible
While refinancing student loans can impact your credit score, it’s not a reason not to seek out the opportunity to improve your financial life tremendously. Just make sure you only apply for loans and lines of credit you’re serious about obtaining, spread out major financial moves as much as you can, and always be responsible with all your credit accounts.
“This article, Will Refinancing Student Loans Hurt My Credit Score?, was originally published on studentloanhero.com.”