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Does Refinancing Student Loans Hurt Your Credit?
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Does Refinancing Student Loans Hurt Your Credit?

While refinancing your student loans has clear financial advantages, including lower interest rates and lower monthly payments, it’s also good to be aware of any negative credit impact that can result. 

If you are worried about the impact refinancing could have on your credit, fear not and follow our steps to limit the negative impact to your score.

Can Refinancing Hurt Your Credit?

The act of refinancing means you are applying for a new loan, so there will be a ‘hard credit inquiry.’ Any hard inquiry will have a temporary, and negligible, impact on your credit score. Typically your score will drop by five points or less, but if you submit a number of applications it might drop more. All hard pulls stay on your credit report for up to two years.  

What is a hard credit inquiry?

When you complete a full application for a credit card or loan, lenders typically make a hard credit inquiry (also called a hard pull or hard check) as part of the underwriting process. This allows your credit report to be reviewed by the lender. 

By comparison, a soft credit inquiry occurs when a company or person looks at your credit report for a reason other than underwriting a loan and has no impact on your credit score. Unlike a hard inquiry, these may or may not happen with your permission when you are considering a credit opportunity. Checking your own credit score is also considered a soft credit pull.

Limiting the impact of rate shopping on your credit score

You may be able to avoid incurring multiple inquiries on your credit by applying to multiple lenders within a 14-45 day ‘shopping period,’ the length of which depends on the FICO scoring formula the credit bureau uses. In other words, inquiries for the same service in a short timeframe may count as only one inquiry, rather than several.

According to Equifax, “Multiple inquiries from auto loan, mortgage or student loan lenders typically don’t affect most credit scores,” so this tactic may not work for other lines of credit, such as applying for credit cards. 

Missing payments while refinancing

Make sure to continue to make payments while your refi application is processing. If you are late or miss a payment on your loan during this process, your credit score could take a hit.  

Once you have signed your new loan agreement and finalized your student loan refinancing, you will want to keep up your on-time and complete payments with your new loan. Missing a payment after refinancing will have the same negative impact on your credit score that it did before you refinanced. 

How Refinancing Can Help Your Credit

Lowering your payment to an amount where you can make complete, on time payments will improve your payment history, which makes up 35% of your FICO score. 

Besides its direct impact, refinancing can also give you more clarity on your credit and be the kick in the pants you needed to make changes that improve your score.

To wrap up, it’s important to be aware of the impact you could have on your credit score by shopping for a student loan refi deal. However, this shouldn’t stop you from finding a lower rate that helps you make a positive impact in your credit score in the long term.

Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.