How Refinancing Student Loans Can Impact Your Credit Score

Refinancing student loans can be a savvy financial move, but it's wise to understand the temporary impact it can have on your credit score. Here’s what you can expect.

1. The Hard Inquiry: When you apply to refinance, lenders perform a hard credit check. This can cause a small, temporary dip in your score, though multiple inquiries within a short window are often treated as one.

2. Closing Old Accounts: Once your new loan pays off the old ones, those original accounts are closed. This can reduce the average age of your credit history, a factor that might temporarily lower your score.

3. Opening a New Account: A new loan is added to your credit report. This new account also lowers the average age of your accounts, which can initially have a slight negative effect on your score.

4. Building Positive History: Over time, making consistent, on-time payments on your new refinanced loan builds a positive payment history. This is the most significant factor and will help your score recover and potentially improve.

How Much Will Refinancing Student Loans Affect Your Credit Score?

Refinancing your student loans can influence your credit score in several ways, both in the short and long term. Here are the key factors to consider before moving forward.

• Hard Credit Inquiry. Applying to refinance triggers a hard credit check, which can temporarily dip your score by a few points. Multiple inquiries in a short window are often treated as one, minimizing the impact on your score.
• Average Age of Accounts. Closing old loans reduces the average age of your credit history, which can have a negative effect. This impact usually lessens over time as your new refinanced loan begins to age.
• Payment History. A new loan gives you a fresh opportunity to build a positive payment history. Making consistent, on-time payments on your refinanced loan will have a significant positive impact on your credit score over time.

How You Can Avoid Refinancing Student Loans Affecting Your Credit Score

Shop for Rates Strategically

To minimize the impact of hard inquiries, submit all your refinance applications within a short window, typically 14 to 45 days. Credit scoring models often treat multiple inquiries for the same loan type as a single event, which lessens the temporary dip to your score.

Understand Account Age Impact

Refinancing closes old accounts and opens a new one, which can temporarily lower the average age of your credit history. This effect is usually minor and is quickly offset by maintaining a consistent record of on-time payments on the new, consolidated loan over time.

Ways to Improve Your Credit Score

Improving your credit score is crucial for your financial well-being, and thankfully, it's always possible to make positive changes. With consistent effort, you can see meaningful improvements by following some proven methods.

• Monitor Your Credit Reports. Regularly check your reports from the major bureaus to spot and dispute any inaccuracies, which helps prevent errors or identity theft from damaging your score.
• Establish Automatic Bill Payments. Since payment history is the single largest factor in your credit score, setting up automatic payments is a simple way to ensure you never miss a due date.
• Reduce Your Credit Utilization Ratio. Aim to keep your credit card balances below 30% of your total available credit, as a lower ratio shows lenders you're not over-reliant on debt.
• Diversify Your Credit Mix. Lenders like to see that you can responsibly manage different types of credit, such as credit cards and installment loans, which can positively impact your score.
• Limit Hard Inquiries. Applying for too much new credit at once can temporarily lower your score, so it's best to space out your applications and only apply when necessary.
• Become an Authorized User. Being added to a trusted person's credit card account with a strong payment history can help boost your own credit profile.

The Bottom Line

While refinancing student loans initially causes a small, temporary drop in your credit score, responsible management of the new loan can lead to a stronger credit profile over the long term.

Frequently Asked Questions

Will refinancing student loans hurt my credit score?

Refinancing can cause a temporary, minor dip in your credit score due to the hard credit inquiry and the new loan account appearing on your report.

How long does refinancing affect my credit score?

The small dip from a hard inquiry typically only lasts a few months. Your score can recover quickly with consistent, on-time payments on the new loan.

Can refinancing student loans improve my credit score?

Yes, over time it can. Making consistent, on-time payments on your new loan will build a positive payment history, which can help improve your credit score.