Does Refinancing Student Loans Hurt Your Credit Score?

Refinancing student loans can be a helpful way to cut your debt bill down and pay off loans faster. That doesn’t mean it’s all good, though. Because lenders rely on credit reports to determine whether you’re worth the lending risk, they do a hard credit pull when reviewing your application to refinance, which can hurt your credit score temporarily.

Having the highest possible credit score enables you to access the best rates and financing options and get through the application process relatively unscathed. Here’s a closer look at how refinancing student loans can hurt your credit score, whether it's worth the risk, and how to minimize its impact on your credit score.

How refinancing student loans can hurt your credit score

When you took out federal loans, you weren’t subject to a hard credit check. That’s not the case with refinancing or taking out private student loans. For non-federal loans, your credit is often the determining factor to qualify for the loan.

Private lenders use hard credit inquiries to determine the creditworthiness of loan applicants. Some lenders let you check rates before applying for a loan. Shopping around for interest rates requires a soft credit check, which doesn’t hurt your credit score.

Think of a soft credit check as a general overview, whereas a hard check is a deep dive into your credit. Anytime a hard credit check occurs, whether it's for student loans, a mortgage, auto financing, or applying for a credit card, your credit score drops temporarily.

Related: What Credit Score Is Needed for a Student Loan?

According to TransUnion, one of the three major U.S. credit bureaus, a hard credit check can drop your credit score 10 to 20 points. Multiply that by five credit inquiries over a month or two, and your credit score could drop as much as 100 points.

Hard credit pulls remain on your credit report for two years, although their negative impact lessens over time. The good news is that your credit score is determined by more than just new credit accounts and applications. New credit only accounts for 10% of your FICO credit score. Credit payments and credit utilization have a much larger impact on your score.

The value of refinancing student loans vs. taking a hit to your credit score

Despite the temporary credit score drop, refinancing student loans represents one of the best strategies for cutting down student loan debt. Depending on what rates you qualify for, you can cut down your monthly payments, pay off your debt faster, and drastically reduce interest payments over the loan’s term length.

For example, let’s say you currently have $80,000 student loan debt with seven years left on your standard 10-year student loan at a 7% interest rate. Your monthly loan payments are currently $1,207.

If your credit has improved enough to qualify for a 5% interest rate for the same seven-year period, your monthly payment drops to $1,131. Over the seven years, you’ll save over $6,300, including $1,600 in the first year alone.

Check out our Refinance Calculator to see how much you can save by refinancing your student loans.

Remember, your credit score is a tool — it can be used as leverage. Your score takes a small hit each time you look into financing a purchase, whether it's a loan, a new car or a home. But if you have a good credit score, you’ll have access to much better rates and financing options.

When refinancing your student loans can cost you

Refinancing student loans can cut thousands of dollars off your total debt, but there are times when it could cost you money and access to valuable perks.

Refinancing while taking out a mortgage

For most people, a mortgage is the largest loan they will ever take out. Student loan refinancing and applying for a mortgage will both drop your credit score significantly.

If you apply for both around the same time, there's a good chance that your score could drop enough to put you into a lower tier of interest rates on one or both of these loans. If you plan to buy a home soon, it’s best to wait a while before you refinance student loans.

Access to federal protections

If you have federal loans, you have access to many valuable tools to help with repayment. Federal perks include:

• Income-driven repayment plans
• Forbearance
• Deferment
• Loan forgiveness options

When you refinance, your federal loan becomes a private loan, and you lose access to all of those resources. Unless refinancing drops your interest rate considerably, you might be better off exploring other repayment options, including consolidating your federal loans.

How to protect your credit score when refinancing student loans

• Shop around within a short period of time: Multiple hard credit inquiries that occur during a short period may only count as one inquiry. The window of time varies based on the specific scoring model, from 14 days to 45 days. If you're checking rates, keep all of your inquiries within a couple of weeks to lessen the impact on your credit score.
• Take advantage of prequalification: Only a full loan application warrants a hard credit check, but many lenders let you check rates with a soft credit pull. Save hard credit checks for loans you qualify for and lenders with the best rate options.
• Make student loan payments until your refi is complete: Make sure your refinanced loan is complete before you end loan payments to the original lender. The last thing you want is for a missed or late payment to show up on your credit report at the last minute and hurt your score.
• Keep up on your refinanced student loan: Once the refinancing process is complete, be sure to keep up with your loan payments. Any late payments will hurt your credit score. Full, on-time payments have the opposite effect, lifting your score.

Refinancing student loans doesn’t have to be a burden on your credit. Responsibly paying off student loans will help establish a good credit history. If you’re thinking about refinancing your student loans to save money, compare rates to find the best option for you.

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