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Student loan debt has become a crisis in the United States. The total student loan debt now totals $1.5 trillion—higher than the nation’s total credit card debt.
Many struggling borrowers, in an effort to save their credit history and get into a more manageable payment structure, refinance their student loans.
However, when it comes to student loans, does refinancing hurt your credit? There are both good and bad effects on your credit score.
How Does Refinancing Student Loans Affect Your Credit?
When you refinance your student loans, you apply for a new loan that will be used to pay off some or all existing student loan obligations. The new loan can come with a fixed interest rate that won’t change for the life of the loan – or a variable rate loan that might, at times, be lower than the fixed interest rate.
Instead of making payments that are applied over several different student loans accruing interest at different interest rates and terms, you’ll have one loan, one payment, and one rate. Doing this has several impacts on your credit history.
How Refinancing Can Hurt Your Credit
When you apply for a refinance, the lender will do a hard credit inquiry. Unlike a soft inquiry, this can drop your score a few points temporarily. It also stays on your credit report for up to two years. If you’re thinking of applying for a mortgage, auto loan, or other type of credit soon after refinancing, the change might keep you from receiving the best rates possible.
While you’re waiting for the loan to go through, you need to keep making payments on the old loans. If your reason for refinancing is to lower your monthly payment, you could find yourself in a financial bind.
How Refinancing Can Help Your Credit
For many borrowers, the biggest advantage to refinancing is the lower payment amount. If you extend the repayment term, you’ll be paying the new loan for a longer term, but you’ll also have lower monthly payments.
Ideally, that means you might be less likely to struggle with your payments, and hopefully will establish a good payment history over time. That can raise your score significantly and will show commitment to paying your financial obligations, which lenders love to see when you apply for additional credit.
Credit Tips for Student Loan Refinancing
If you’ve decided that refinancing your student loans makes sense, make sure that you have a good understanding of your credit history and how a new loan will affect your score. Be aware that it will take a few months to build a payment history on the new loan, and it will also take a few months for your score to recover from the small ding from the hard inquiry.
Also, monitor your credit report closely before, during, and after any student loan refinance to ensure that all payments are being recorded accurately and that you’re getting credit for those payments. Also check to make sure that your lender change, if any, is also properly reflected on your credit report.
If you pay attention to your credit report and keep track of all documentation, there’s no reason why a student loan refinance needs to hurt your credit in the long term. In fact, you may find that your credit is much better off over time.
Author: Jeff Gitlen