Student Loan Refinancing and Your Credit Score: What to Know

Refinancing student loans could be a smart move, especially if your finances have improved since you initially took out your loans.

Your new financial picture could afford you a loan with more favorable terms than your existing loan or loans. Keep reading to learn what you need to know about student loan refinancing and your credit score:

How Student Loan Refinancing Works

Refinancing may allow an eligible borrower to combine all their private or federal loans into one single loan with new terms. If you qualify for refinancing, you could see reduced interest rates, a shortened or lengthened loan term, or lower monthly payments. (Note that if you refinance federal loans with a private lender, you will lose federal student aid benefits, such as certain repayment program options.)

Refinancing doesn’t necessarily reduce your total debt—but it might allow you to better manage how much you owe over time, and can reduce the total amount of interest you could pay over the life of the loan.

What is a Credit Score?

A credit score is a numerical measure of your financial health.

Your credit score is calculated by analyzing your credit history, including past financial obligations and how you have managed them. Credit scores range from 300-850, with higher scores representing greater fiscal responsibility.

Factors That Make Up a Credit Score

Payment history: The most significant factor in how your score is calculated, payment history looks at your ability to pay your bills on time. It factors in any missed or late payments and makes up 35% of your credit score.

Credit utilization: Your utilization ratio refers to the amount of credit you are using in relation to the total amount of credit you have available. Credit utilization makes up 30% of your credit score—and many experts recommend that you keep your utilization at about one-third of your available credit.

Credit mix: It can be beneficial for your score when you hold different types of debt, including revolving debt (such as credit cards) and installment debt (such as student loans). Credit mix makes up 15% of your credit score.

Length of credit history: The longer you’ve been responsible for paying off your debts, the better it is for your score. Length of credit history makes up 10% of your FICO credit score.

New accounts: When you open a new account, it can lower the average age of your accounts, which could negatively impact your score. New accounts make up 10% of your credit score.

Do You Need a Certain Credit Score to Refinance Your Student Loan?

Generally, lenders do require a minimum credit score for student loan refinancing. What that score is, however, is subject to several factors. It often varies depending on the lender and the type of loan, so it is best to speak with your desired lender or lenders directly to find out their specific requirements.

Even if you are in the process of rebuilding your score and it’s lower than you’d like, refinancing isn’t off the table. Lenders may still work with those who show responsibility in other ways. For example, some lenders will consider your income (or earning potential), your debt-to-income ratio, or even allow for a co-signer when applying for refinancing.

Does Refinancing Hurt Your Credit Score?

A sometimes-unexpected bump in the road: applying for a new loan can actually ding your score. If you opt to refinance through a lender that runs a “hard inquiry” from one of the three major credit bureaus, it could cause a slight dip in your credit score—but it’s temporary. Most scores can recover within six months.

If you choose to apply for student loan refinancing with a bank or other financial institution that does not require a hard check, there may be no impact on your credit score.

Final Thoughts

Student loan refinancing can be a great way to manage your payment plan and potentially save money over the life of the loan.

Knowing how the process works and understanding your own score are all important steps in making an informed decision.

Ultimately, understanding what refinancing student loans looks like may help you find the most favorable terms for your needs.