Refinancing your student loan debt is a great way to lower your expenses. It could result in lower monthly payments and save you thousands of dollars in interest charges. But, if you plan to buy a home or car this year, you want to make sure the refinance process helps you build credit, not tear it down.
Refinancing allows you to pay off multiple loans with one new loan. It is also important to remember that it can affect your credit. Take a look at these three ways in which refinancing could impact your credit:
1. Submitting multiple private student loan applications over a period of time.
While searching for student loan refinancing options, you might be tempted to apply to several lenders to see who offers the lowest interest rates and best repayment terms. Searching for the best loan program can be a good idea, but completing multiple full loan applications outside of a 14- to 30-day window can temporarily lower your credit score.
Submitting a formal credit application allows the lender to pull your credit from at least one of the three major credit reporting bureaus: Equifax, Experian, and TransUnion. This is called a hard credit inquiry and may lower your FICO Score. Such inquiries can affect your score for up to 24 months.
To prevent multiple hard inquiries from affecting credit scores, myFICO® recommends that rate shoppers keep their applications within a maximum 30-day period. Multiple hard credit checks inside of this window count as one inquiry.
A soft inquiry is a request to review your credit report, but not for the purpose of making a formal credit decision. Soft inquiries occur when you check your own credit or a potential employer performs a credit pre-screen as part of the hiring process. This type of inquiry does not affect your score.
LendKey’s Check Your Rate application uses a soft credit inquiry. Use it to explore your refinancing options without affecting your credit score.
2. Stopping payments on current loans before your refinance is complete.
When you receive confirmation that you’ve been approved for a student loan refinance, don’t assume that the lenders will handle all the paperwork. You must remain an active participant and ensure you continue making payments on your current student loans until the new loan has paid off your existing loans.
Missed payments will negatively affect your credit score. Work closely with lenders to ensure you know when to stop paying on existing loans and to start paying the new one.
3. Missing payments on your new loan.
A refinanced loan is still a debt that must be repaid according to the loan agreement’s terms and conditions. Be careful to select repayment terms that fit your budget. Confirm your new due dates and make every payment on time. Missed or late payments will harm your credit score regardless of loan type. This information can remain on your credit reports for up to seven years.
If you have a problem making your payments, contact your lender or servicer immediately. You may qualify for a financial hardship program that allows you to temporarily pause payments or lower your minimum payment amount without negatively affecting your credit.
Refinancing your student loans can have an impact on your credit score. But, the extent to which the process negatively affects your credit mostly depends on your financial responsibility. Enjoy the benefits of a lower interest rate and reduced monthly payments by exploring your refinancing options today.
Ready to shop for a lower interest rate? Provide LendKey with a few details to quickly Check your Rate without affecting your credit score.