Student loan financial obligation is a significant problem for countless Americans — and lots of customers will feel the crunch much more acutely this fall, when the federal trainee loan payment time out ends. Those that were relying on trainee loan forgiveness won’t see relief either, a minimum of not in the method President Joe Biden initially revealed it, now that the White House’s broad trainee loan forgiveness strategy has actually been overruled by the Supreme Court.
For some individuals, re-financing trainee loans to protect a lower rates of interest, lower month-to-month payment or a smaller sized variety of loan accounts can assist alleviate the problem of month-to-month payments. The procedure won’t alter your overall loan quantity, though it might assist make it simpler to settle.
But there are some requirements for refinancing, consisting of having a great credit report. This guide will discuss the relationship in between your credit report and the procedure of re-financing trainee loans, including what score you require to re-finance, how your rating impacts the regards to your brand-new loan and how your rating is impacted after you re-finance.
How credit history impact your application for trainee loan refinancing
When you use to re-finance your trainee loans, among the very first things any loan provider will do is carry out a credit check, that includes an evaluation of your credit report. Credit ratings are produced by credit bureaus (the 3 significant bureaus are Experian, Equifax and TransUnion), based upon information about your payment history on other loans and total credit use.
Why loan providers utilize your credit report
Lenders utilize these ratings to evaluate your credit reliability — ball games assist anticipate whether you’re a dangerous prospect for a loan. A greater credit report informs a lending institution that you’re most likely to repay a loan on time, while a lower credit report suggests you might have some less-than-ideal credit practices, or that you might have struggled to settle a loan in the past. Sometimes a lower credit report merely suggests that you are young and have an extremely minimal credit report. Higher ratings can enhance your eligibility for more beneficial loan terms (believe lower rates of interest and lower month-to-month payments).
Minimum credit report required to request trainee loan re-finance
The requirements for trainee loan refinancing is various throughout loan providers, however you’ll normally require a FICO rating in the mid-600s to certify. That number might be somewhat greater or lower in between various loan providers. Lenders likewise take a look at other consider addition to your credit report, like your debt-to-income ratio.
But keep in mind: A rating at the bottom end of a lending institution’s variety doesn’t mean you’ll get the most favorable terms. If your credit score is fair when a lender prefers candidates to have good or excellent credit (a score in the 700s or above), you’ll likely be stuck with a higher interest rate and higher monthly payments.
When is student loan refinance a good idea?
If you’re thinking about how to refinance student loans, you should consider whether it makes sense for your individual circumstances before you proceed.
If you have federal student loans, your only option to refinance will be to swap your current loan(s) for a new debt with a private lender. Switching to a private lender will mean you no longer have access to federal student loan protections and perks, like Public Service Loan Forgiveness. The pandemic moratorium on student loan payments (set to officially end in October) also only applies to federal student loans. If you refinance, you’d no longer be eligible for federal forbearance, deferments or other types of financial-hardship programs.
But if you already have private student loans — and you’re paying a relatively high interest rate — refinancing can make more sense and can potentially help you secure a new loan with a lower rate. If you can’t get a lower rate by refinancing, you should think carefully about your goals before moving ahead with the process.
If, for instance, your primary goal is refinancing into a longer repayment term so you have smaller, more affordable monthly payments, then it may still make sense to refinance even if you aren’t getting a new interest rate that’s lower than your old one. But know that this will cost you much more in the long run, since you’ll be paying interest over a longer period of time. Keep in mind that while all federal loans have fixed interest rates, when you refinance with a private lender, you can typically choose between a fixed or variable interest rate.
Refinancing can also make sense for borrowers who have multiple student loans with outstanding balances. Refinancing will let you consolidate multiple balances into one new loan — a type of debt consolidation. This will simplify your monthly payments, as you’ll have a single payment instead of multiple. Reducing the number of loans you hold could give your credit score a boost, too. (If you have federal loans, student loan consolidation is slightly different. A Direct consolidation loan allows you to combine all your loans into a single one, but it won’t result in a lower interest rate.)
How credit scores affect your interest rate
As with any loan, a higher credit score means a lender is more likely to give you a lower interest rate on your loan. If you have a good credit score when you apply to refinance, the better your chances of securing a smaller monthly payment and paying less in interest over time. But remember: securing a lower interest rate is harder today than it was a couple years ago. Interest rates across all types of consumer loans are high as the Federal Reserve continues its fight against inflation.
A lower credit score doesn’t necessarily preclude you from qualifying for refinancing, but it does make it more likely you’ll end up with a high interest rate and less favorable loan terms.
What to do if your credit score is not good enough to refinance your student loan
If you have bad credit, or credit on the lower end of a lender’s preferred range, you still have options for refinancing your student loans.
One option is to apply for refinancing with a cosigner. That person will need to have a credit score that meets the lender’s requirements, and they’ll sign onto the loan with you, the primary signer, and agree to assume the risks if you aren’t able to pay it off. That’s a big commitment — make sure you both understand what’s involved before signing.
You can also consider some ways to improve your credit score, like reducing the amount of credit you’re using in other areas, putting credit cards and bills on autopay or signing up for a free credit-building program. Then apply again after you’ve raised your score.
How refinancing your student loan affects your credit score
Your credit history determines the loan terms you’re offered when you refinance, but the relationship does not end there.
How your credit score is affected during the application process
When you apply to refinance your student loans, the lender will perform what’s known as a “hard” credit inquiry. That inquiry will be reflected in your credit report and it could lower your score for a short period of time. If you’re applying to multiple lenders, the hard inquiries typically will count as a single inquiry if you apply to all the lenders over a short time period. But if your rate shopping extends for a month or longer, then you could end up with several hard inquiries on your credit report.
How your credit score is affected after taking out the loan
The effect of a new student loan on your credit score depends on your individual circumstances. If you consistently make your monthly payments on time, for instance, you could boost your score as you build a more robust history of on-time payments. If you pay late, your score could take a hit.
Refinancing your student loans will also affect the average age of your accounts, especially if you’re closing multiple old loan accounts and taking out just one new one. Having newer credit accounts generally lowers your score, while having longstanding accounts is generally better for your credit. Your score might take a hit in the beginning, but it will rebound as you rebuild your credit history by making payments on the new loan.
What happens to your credit score when you finish paying off your refinanced student loans
Your credit score might not change at all after you’ve paid off your new loan balance — data about your payment history over the life of the loan will continue to affect your score even though the account is closed.
Credit bureaus track how many accounts you have open at once. Your score could see a bump if you had a large number of existing loans, or it could drop slightly if the loan was one of the only accounts you had open.
What happens if you fall behind on your refinanced student loan payments
Falling behind on your refinanced student loan payments is just the same as falling behind on the payments on your student loans before you refinanced. If you are consistently late with your payments, you could accrue costly late fees and your credit score could suffer. Depending on how late your payments are, you could be subject to collections.
Student Loan Refinance and Credit Scores FAQ
Do student loans affect your credit score?
Yes, taking out federal or private student loans will affect your credit score. Student loans can help you build a strong credit history, if you consistently make on-time payments. If you miss payments, then your student loans will hurt your credit score.
Does refinancing student loans hurt your credit?
It depends on your individual circumstances. Hard credit inquiries from lenders during the application process may take a few points off your score in the short term, but consolidating multiple loans into one loan that you’re more easily able to pay back over time could boost your credit in the long term.
What does your credit score need to be to refinance student loans?
There’s no universal minimum credit score that lenders require from refinancing applicants. In general, you should have a credit score in the mid-600s, though the exact requirements vary between lenders. A score on the lower end of a lender’s preferred range will imply less beneficial loan terms, while a higher score will mean more generous terms (like a lower interest rate and lower monthly payments).
Bottom line to credit scores and student loan refinance
If you’re looking to refinance your private student loans, your credit report will have a big impact on the process. A higher credit score will help you secure a lower rates of interest, but it isn’t strictly necessary to secure a brand-new loan during the refinancing process.
If refinancing makes it easier to afford your payments and helps you stick to a repayment plan, the process could assist you enhance your credit in the long run.
