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A Guide to Credit Scores and Student Loan Refinance
By Michelle Lambright Black MONEY RESEARCH COLLECTIVE
There are many factors to consider when you want to refinance private student loans – and your credit score should be at the top of the list. A good credit score can be an asset when you refinance student loans, making it easier to qualify for financing and potentially saving you a lot of money.
But you’ll also want to examine the other side of the equation—how refinancing student loans might change your credit score. It’s wise to learn about common credit score mistakes to avoid where student loan refinancing is concerned as well.
Table of contents
- How credit scores affect your application for student loan refinancing
- How refinancing your student loan affects your credit score
- Bottom line: Credit scores and student loan refinance
How credit scores affect your application for student loan refinancing
Wondering how to refinance student loans? The best student loan refinance companies typically start with a review of your credit score.
When you apply for financing, a lender needs to make sure that loaning you money is a wise investment. To make this assessment, a lender uses a loan application to collect and review key information such as your:
- Job Status
- Employment History
- Income
- Credit Report
- Debt-to-Income Ratio
- Credit Score
These details and others can help a lender determine how likely you are to repay your loan (plus interest and fees). They can also shed light on the question of whether you have the capacity to repay your debt.
A high credit score could make it easier to qualify for a new student loan to refinance your current debts. But a low credit score might cost you more money or perhaps even disqualify you from refinancing altogether.
Why lenders use your credit score
Lenders use credit scores like FICO and VantageScore because these tools provide a consistent and reliable way to predict risk. The job of a credit score (aka its stated design objective) is to predict the likelihood that you’ll pay a credit obligation 90 days late or later anytime in the next 24 months.
Credit scores help private lenders steer clear of loaning money to people who are unlikely to repay their debts as promised. By avoiding (or at least reducing) late payments, defaults, and the expenses that come along with such issues, lenders earn more money – which is, after all, why they’re in business.
This setup can benefit you as a consumer, too. Controlling costs can keep the price of financing down for everyone—especially if you work hard to earn and keep good credit.
How credit scores affect your interest rate
If you qualify to refinance your student loans, your credit score can affect the amount of interest you’ll pay. Most lenders reserve their best interest rates for borrowers with good to excellent credit scores.
When refinancing student loans, it’s important for your new loan to feature a lower interest rate than what you’re already paying. Without a lower rate, this type of debt consolidation might not make sense. For the best chance of qualifying for a competitive interest rate on your new loan, your credit needs to be in the best shape possible.
Minimum credit score needed to refinance student loans
There’s no universal minimum credit score you need to earn to qualify for a student loan refinance. Each lender sets its own qualification criteria. Yet as a rule of thumb, you or your cosigner will typically need at least a fair credit score to refinance student loans.
Depending on the scoring model a lender uses, a fair credit score might fall into one of the following ranges.
- Fair FICO Score: 580-669
- Fair VantageScore Credit Score: 601-660
However, just because your credit score is in the “fair” range doesn’t mean it’s high enough to qualify for financing. Private student loan lenders often have minimum credit score requirements that fall within the fair credit score range, not at the bottom of it.
So you might need a credit score of 650, 670, 700, etc. to qualify to refinance your student loans. It all depends on the lender. Nonetheless, the higher you can raise your credit score, the better.
What to do if your credit score is not good enough to refinance your student loan
In general, there are two options to consider when your credit score isn’t high enough to refinance your private student loans. First, you can work to improve your credit score and try to refinance again later. You can also search for a cosigner.
- Credit Improvement. There are many ways to improve your credit score. If you’re not sure where to start, get a free copy of your three credit reports from AnnualCreditReport.com. Learning about the details on your credit report can help you spot areas that need improvement (and you can see if there are any credit report errors to dispute as well).
- Cosigner. If you have bad credit, some lenders may still be willing to work with you if you have a cosigner with a good credit score. But you should understand that you’re asking your friend or family member to take a big risk by cosigning. If something happens and you don’t repay the debt as promised, your loved one might face credit damage, lawsuits, wage garnishments, and other negative consequences.
How refinancing your student loan affects your credit score
Does refinancing student loans hurt your credit score? As with most credit-related questions, there’s no single correct answer to this question.
There’s a chance that refinancing your student loan could both help and hurt your credit score. Here are the details you need to know.
How your credit score is affected upon application
When you apply for a new student loan, a lender will check your credit score to assess the risk of loaning you money. This process is called a credit inquiry.
Credit inquiries that occur as part of an application for financing (aka “hard” credit inquiries) may damage your credit score in the short run. Therefore, the act of applying for a loan and letting the lender pull your credit report might trigger a slight reduction in your credit score.
Yet not all hard inquiries lower credit scores. And when a credit score decline does occur, it’s usually minimal and doesn’t affect your score for long. According to FICO, an additional credit inquiry usually takes less than five points off someone’s FICO Score. However, the effect on someone’s score will usually disappear within a year, and will usually fall off your credit report completely in two years.
How your credit score is affected after refinancing
Once a new loan appears on your credit report, the account could both help and hurt your credit score in several ways.
Your credit score might benefit from the account if you:
- Pay on time. As you add on-time payment history to your credit report, that good credit history could work in your favor.
- Reduce the number of accounts with balances. When you refinance, the new loan could wipe out the balances on several existing student loans on your credit report. Having fewer accounts with balances might have a slight positive effect on your credit score.
Your credit score might react negatively to the new account if you:
- Pay late. Late payments—especially recent late payments and more severe late payments (i.e., 60 days late, 90 days late, etc.)—could cause credit score damage.
- Reduce your age of credit. A new account on your credit report can lower your average age of credit. You might also “reset” the age of your newest account. Both of these factors can be negative from a credit score perspective. But as your new loan grows older, any negative impact you might have experienced here should dissipate.
What happens to your credit score when you finish paying off your refinanced student loans?
Paying off the loan balance on an installment loan, like a refinanced student loan, typically doesn’t have much impact on your credit score. By contrast, paying down a credit card balance (even a much smaller balance by comparison) might lower your credit utilization ratio and possibly boost your credit score.
However, some credit scoring models do pay attention to the number of accounts with balances that appear on your credit report. So reducing the number of accounts with outstanding balances might trigger a small credit score increase for some consumers.
Bottom line: Credit scores and student loan refinance
Private student loans don’t come with federal student loan benefits like income-based repayment plans, public service loan forgiveness, loan forgiveness programs, deferment, forbearance, and more. So while it might not make sense for those with federal student loans to refinance them, private student loan borrowers will usually benefit from refinancing at a lower interest rate.
Having a good credit score can make it easier to accomplish this goal. But it’s important to manage your new student loan wisely after you refinance as well. Doing so could go a long way toward helping you maintain the good credit rating you’ve worked so hard to achieve.
Michelle Lambright Black is a nationally recognized credit expert with two decades of experience. Founder of CreditWriter.com, Michelle's work has been published thousands of times by FICO, Experian, Forbes, Bankrate, MarketWatch, Parents, U.S. News & World Report, and many more.