When you refinance your student loans, a lender will pay off your existing loans and give you a new loan. Ideally, the new loan will come with a lower interest rate that can allow you to save big time on interest.
Refinancing your student loans can also give you the opportunity to change your repayment term and consolidate multiple student loans from various lenders into a single, more manageable loan. Since you’ll only have one payment and balance to keep track of, the student loan payoff process can be easier and more convenient.
If this sounds like a good option for you, you may be asking yourself if refinancing hurts your credit. Before applying for a refinance, here’s everything you should know about credit score and refinancing.
Typically, the act of refinancing student loans shouldn’t have much of an influence on your credit.
However, applying for a student loan refinance does require a credit check — which could negatively impact your credit score.
The good news is that, with PenFed Credit Union, you can see and compare your refinance options with a soft credit check first, before submitting an application. Soft credit checks won’t change your credit score or appear on your credit report.
Although the act of refinancing usually doesn’t affect your credit on its own, how you manage your loan payments — both during the process and after the refinance takes effect — can increase or decrease your credit score.
Here are some ways that student loan refinancing can affect your credit score.
Payment history plays a significant role in your credit score. Therefore, if you refinance your student loans and make it a priority to make on-time payments, your credit score could go up.
In the event you make late payments on your refinanced student loans or skip them altogether, your credit score could take a hit. Late or missed payments can stay on your credit report for up to seven years, so it’s crucial to stay on top of them.
Filling out too many refinancing applications in a short time period can lead to multiple hard inquiries on your credit and ding your score as well.
Fortunately, there are some things you can do to keep refinancing from taking a toll on your credit score. We suggest the following tips:
Make Timely Payments on Your Refinanced Student Loans: Once you refinance your student loans, make every payment on time. If you’re worried you’ll miss a payment, sign up for automatic withdrawals or set up calendar reminders in your phone. Don’t refinance your student loans unless you’ve found repayment terms that work comfortably with your budget and you're confident you’ll be able to make timely payments.
Pay Current Student Loans Until Your Refinancing Lender Gives You the Green Light: Many people assume they can stop paying their current student loans once they apply for refinancing. Doing this will hurt your credit if you miss a payment with your existing lender during the refi process. It’s essential to continue to make your current student loan payments until your new lender gives you the final approval and your loan is paid off.
Limit Your Student Loan Refinancing Applications: Any time you fill out a refinancing application, a lender will perform a hard inquiry, which may lower your credit score by a few points. So it’s a good idea to pre-qualify with a lender like PenFed when exploring your options as this will not affect your credit score.
Allow PenFed to Handle Your Refinancing Needs: PenFed Credit Union offers student loan refinancing with flexible 5, 8, 12, and 15-year terms as well as low rates for those who qualify. We make it easy for you to check your rate before applying, without hurting your credit score. In addition, we work with you to design a payment plan that is ideal for your unique budget and lifestyle needs so that you can make timely payments and improve your credit over time.
While it’s true that refinancing your student loans can hurt your credit score, there are many things you can do to keep it to a minimum. Additionally, by making timely payments on your refinanced student loans, you can prove that you’re a responsible borrower and enjoy a bump in your credit score.
If you’d like to refinance your student loans, do so in a smart, strategic way that can improve your credit score. Remember that student loan refinancing can save you money and put you in a much better financial situation. So don’t let the fact that it may hurt your credit score stop you from moving forward with a refinance.
Start today by checking your rate with PenFed.