If you’re thinking about refinancing your student loans, you may be wondering how it affects your credit.
Will consolidating your student loans help your credit score, or does refinancing student loans actually hurt credit?
The algorithms used to calculate your credit score are complex, and there are countless variables that go into that three-digit number. As a result, it’s impossible to say exactly how consolidating your student loans with a private lender will affect your credit score. However, it is possible to get an idea of which variables can be helpful, harmful, or neutral.
If refinancing is on your mind and you’re worried about your credit, here’s everything you need to know.
How student loan refinancing works
Student loan refinancing involves consolidating one or more existing loans into one new loan with a private lender. With this process, you may be able to take advantage of lower interest rates, more affordable monthly payments, or a faster repayment schedule.
You can refinance federal student loans, private student loans, or both together. This is in stark contrast to the federal loan consolidation program, which only allows you to combine federal loans.
But unlike the federal loan consolidation program, student loan refinancing requires a credit check, which could influence your credit score. Also, how you manage your loans during the process and after the refinance is complete can also affect your credit score — for better or for worse.
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Will consolidating my student loans help my credit score or hurt it?
For the most part, the act of refinancing your student loans itself doesn’t have a significant impact on your credit score. However, it is possible to see a credit score increase or decrease after student loan consolidation in the long run, depending on how properly you handle your debt.
Here are the different ways refinancing your student loans with a private lender can have an impact on your credit score, based on the five factors that go into calculating your FICO credit score.
Your payment history makes up 35% of your credit score, according to FICO, making it the most influential factor in the calculation. While you’re going through the refinance process, it’s essential to continue making payments on your original loans until the new lender pays them off.
If you don’t, you could end up with a late payment fee from the lender. And if it goes unpaid for 30 days or more, it’ll get added to your credit report. In general, refinancing shouldn’t take more than 30 days, but it’s a good idea to continue making payments anyway to be safe.
After you’ve refinanced your student loans, keep making on-time payments every month to build your credit. If you do this on all your loans and practice good credit behavior overall, you may see your credit score improve over time.
How much you owe
This factor makes up 30% of your credit score, but refinancing your student loans shouldn’t affect it much, for two reasons:
- When you refinance student loans, you’re not changing how much you owe; you’re simply combining multiple balances into one new one with the same total.
- This factor is primarily driven by your credit utilization rate, which is calculated by dividing your credit card balances by your available credit. Because it has to do with credit cards, refinancing your loans won’t have any impact.
That said, if you do have credit card debt and work on paying it down, you may see your credit score increase over time. Credit experts generally recommend keeping your credit utilization rate below 30%, but the lower, the better.
Length of credit history
This component of your credit score makes up 15% of the calculation and can be impacted when you refinance your student loans. In addition to how long you’ve been using credit overall, it also considers your average age of accounts.
So when you open a new loan account with a refinance lender, that account’s age is zero, which brings down your average age of accounts. Also, by paying off the original loan accounts, their ages remain the same for the 10 years they’re on your credit reports instead of growing.
Remember, though, that this element of your credit score isn’t nearly as influential as your payment history and how much you owe, so don’t expect drastic changes.
Your credit mix refers to how many different types of credit accounts you have. As a rule, if you can show that you’re able to manage different loan types — such as credit cards, student loans, an auto loan, and a mortgage loan — in a responsible manner, it will reflect positively on your credit score.
But since you’re replacing student loans with another student loan, refinancing shouldn’t affect your credit mix.
Don’t take this factor as a suggestion to open a bunch of different credit accounts, though. According to FICO, your credit mix only makes up 10% of your credit score, and it’s not a crucial factor at all unless your credit file contains very little other information the company can use to create a score.
Virtually every time you apply for a loan, the lender runs a hard inquiry on one or more credit reports to determine your eligibility. This hard inquiry gets added to your credit reports and remains there for two years — though FICO only includes them in its calculations for 12 months.
For most people, one additional hard inquiry will knock less than five points off your credit score, according to FICO. If you have multiple hard inquiries in a short period, however, it could have a negative compounding impact on your score.
The good news is that if you’re shopping around for a student loan refinance lender and apply with multiple lenders in a short period — typically between 14 and 45 days — all those hard inquiries will only count as one when it comes to calculating your credit score.
The bottom line
So does refinancing student loans hurt credit? It can have a small negative impact up front, but as long as you manage your accounts responsibly both during the process and afterward, the potential decrease will typically be negligible and temporary.
If you’re considering refinancing your student loans, be sure to compare rates and other terms from several lenders before you apply. You can do this quickly and conveniently with the Purefy Find My Rate tool, which allows you to compare rates from multiple lenders in one place so you can find the best fit for you.
Plus, it involves a soft credit inquiry instead of a hard one — and soft inquiries don’t have any effect on your credit score.