Refinancing can be one of the best ways to manage repayments and lower the cost of your debt. But in doing so, does refinancing student loans hurt your credit? Refinancing involves taking on a new loan, which requires a hard credit pull and, yes, this will affect your credit. This brings up additional questions.
- Will refinancing student loans hurt your credit?
- Should you go ahead and refinance your student loans anyway?
- To what extent will refinancing student loans hurt your credit?
- Is refinancing worth it?
- How can you minimize the impact of refinancing on your credit?
The fact is, when refinancing your student loans, you can minimize the damage to your credit as long as you go about it the right way. Here’s what you need to know about how to refinance your student loans while limiting the damage to your credit.
How Refinancing Works
When you refinance, you are essentially trading your current loan for a new loan with new terms. You may decide to do this to avail of lower interest rates and save money on your loan or to lower your monthly payments and make them more affordable. If you’re earning a high income and have disposable income, you want to choose to refinance to increase your monthly payments and pay off your debt earlier.
Regardless of why you want to refinance your student loans, your first step will be to research lenders to determine interest rates and other terms and conditions. Most lenders publish their interest rates on their websites. However, you should know that this is not necessarily the rate you’ll pay. The published rates are usually the lowest rates the lender offers and those rates are typically reserved for borrowers with excellent credit. Your interest rate will depend on your credit score and other financial credentials.
When you apply for refinancing, the lender will do something called a “˜soft credit inquiry to check your credit score. A soft credit inquiry or pull grants the lender access to your credit score but not your credit report. If your credit score meets the lender’s minimum requirements, they will get back to you with an estimated interest rate quote. At this point, the rate is only an estimate based on your credit score.
When you submit a formal refinance application, the lender will do a hard credit pull. This involves putting in a formal request to the credit bureaus to grant access to your complete credit report and credit score. Your credit report gives lenders a better idea of your borrowing and payment history and demonstrates whether or not you’re a responsible borrower. The lender will then get back to you with a final interest quote based on your credit report and credit score. This quote may be higher or lower than your estimated quote.
The Relationship Between Refinancing and Credit
A soft credit pull will not impact your credit history or score in any way. On the other hand, a hard credit pull will shave a few points off your credit score. The damage is minimal as the hard credit inquiry will only pull your score down by about 5 points or even less.
The problem arises when you submit numerous formal refinancing applications over the course of a few months. Each hard inquiry will pull your score down by a few points. Multiple hard inquiries can pull your score down by several points, resulting in significant damage to your credit score. All hard credit inquiries stay on your credit report for up to two years.
As you can see, if you’re wondering does refinancing your student loan hurt your credit, the answer is yes it does. But the damage is relatively insignificant as compared to the benefits of refinancing your student loans. Besides, there are things you can do to enjoy the benefits of refinancing while minimizing the damage to your credit score.
How to Refinance Student Loans With Minimum Damage To Your Credit Score
1. Use websites such as Refi.me to estimate your refinancing rate
A smart refinancing strategy is to compare several lenders and choose one that’s offering you the best terms and lowest interest rate. There are ways to do this without damaging your credit score. Remember, only formal refinance applications trigger a hard credit pull that will hurt your score.
One way to prevent this from happening is by comparing student loan refinance rates at sites such as Refi.me. Here you will find a list of the most reputable lenders, their fixed and variable interest rate ranges, and the loan terms they offer. As you scroll down the page, you’ll find more details about each lender along with how to prequalify and estimate your rate without impacting your credit score.
2. Submit all applications within a 14 to 45 day window
Most credit bureaus offer a 14 to 45 day “shopping period.” If you have to submit multiple credit applications for whatever reason, make sure to limit your inquiries and applications to this window of time. Credit card bureaus count all hard credit inquiries made within this time frame as only one inquiry.
Only full, formal refinancing applications trigger hard credit checks. So limiting your applications to this window will limit the inquiries on your credit report, minimizing the damage to your credit score.
3. Don’t stop your current student loan repayments prematurely
Processing a refinancing application can take anywhere from a few days to a few weeks or even a month. While the refinanced loan is being processed, you are still responsible for making the payments on your current loan. You have to continue with the repayments until such time that you receive formal notification from your new lender with details about your new loan.
Submitting a refinance application does not free you from your repayment obligations. If you stop payments prematurely, your lender will report the missed or late payment to the credit bureaus. And this will hurt your score.
4. Stay up to date on your refinanced student loan payments
You’re managed to refinance your student loans with minimum damage to your credit score. To continue building your score, you must be careful not to miss any payment deadlines on your refinanced loan. Late or missed payments are a sure way to hurt your credit score.
Setting up auto-payments on your refinanced loan is the best way to protect your score. You can do this by authorizing your bank to transfer the required amount to the lender every month on a set date. In addition to reducing the risk of missed payments, lenders usually offer a 0.25% rate reduction if you set up autopayments. It may seem small, but the savings can add up over the life of the loan.
How Refinancing Can Actually Help Boost Your Credit
Overall, refinancing can help boost your credit and also save you money if you go about it strategically. In the large scheme of things, that 5 point drop in credit score is worth it when you consider the overarching benefits.
For example, you can lower your monthly repayments and make them more affordable when you refinance. Making the payments more affordable increases the chances that all payments will go out on time. On-time payments have the single biggest impact on your credit score, accounting for as much as 35% of the total. Consistent timely payments will help you strengthen your credit score further.
In time, you can use that good credit score to refinance your student loans for the second or third time. Your improved score will qualify you for even lower interest rates. This makes the payments more affordable and allows you to rack up those savings.
Is Refinancing Student Loans The Best Option For You?
Does refinancing student loans hurt your credit? It can. But it shouldn’t be the only deciding factor. A lot depends on your personal and financial circumstances as well as your potential savings. Make sure to weigh the pros and cons of refinancing before you decide to go ahead. And definitely use a student loan refinance calculator to calculate how much you could potential save before you sign any refinancing agreement.
